When the markets move suddenly or unexpectedly, hedge funds are often cited as the culprit.

The simplest definition of a hedge fund is a private unregulated investment vehicle with a limited number of very wealthy investors.

The reason for the name hedge fund comes from the idea of hedging your bets. Original hedge funds went both long and short of the market, that is they bought shares and sold others which they expected to fall in value (in the hope of buying them back at a cheaper price).

Take the two oil companies; BP and Shell. Suppose you think that BP is undervalued relative to its rival. You could buy BP shares, and go short of Shell. Provided your analysis was correct and BP subsequently outperformed Shell, you would make money regardless of the way the overall market moved.

Some hedge funds borrow many times the market value of their capital. That ability allowed George Soros, the most famous hedge fund manager, to mount his attack on the pound in 1992. Soros is a prime example of a macro hedge fund manager, those who make big bets for or against individual currencies and markets.

Most hedge funds concentrate on trying to make profits out of pricing anomalies in the market, in fields such as mergers and acquisitions or corporate bankruptcy.