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Hedge funds are unusual in their structure. Hedge fund managers are commonly investors
in the products that they sell to those who invest in their firm, so their money is on
the table and at risk. That's a great alignment of interests between the manager and the investor
and brings about innovation. Many managers develop their own tools for making risk assessment
and then develop ways to effectively communicate that risk profile to their investors. Hedge
funds are generally misunderstood by most people. The word "hedge" means in itself to
take an insurance position against a potential loss, so that when a manager is trying to
make sure his own investment - his dollars that are in the deal with his investors - is
protected. He will take extraordinary steps to develop risk management tools and then
reporting methodologies to investors to ensure that investors and regulators are well aware
of the steps that he is taking in managing that money. Contrary to public view, hedge
funds are less risky because they take offsetting positions to insure against loss.