The current image of the hedge fund and/or private equity fund leaves me a bit mystified. It’s as if all the politicians and his merry men decided to gang up on an industry that’s been around for a very long time and serves a demonstrably good purpose in the public and private financial markets.

I’ve been a staunch supporter, not only because I’ve seen it from the inside, but because we have well-functioning markets and my 401(k) thanks them for that. Let’s look at the world of hedge funds for a moment. Sure they may pull down billions in fees (not earnings, as the press would have you believe) and we can all be jealous of that, but many of them also make a lot of money, FOR THEIR INVESTORS.

To summarize, hedge funds (and I use the term almost interchangeably with private equity funds) are partnerships where somewhat wealthy people fund a General Partner with a certain amount of cash. The general partner then takes that money and invests it. If it’s a hedge fund, the money may be locked up for one to three years. If it’s a private equity fund, it may be locked up for five to ten years.

Here’s a breakdown of some of the different types of hedge funds:

Long Only - Only trades the long side of the market and is not particularly well-hedged against a market downturn. Can trade options to minimize the risk.

Long/Short - Trades both sides of the market and holds long positions as well as short positions. Doesn’t care which side of the market it sits on, as long as it’s the winning side.

Market Neutral - Trades both sides of the market and tries to keep the long and short sides of the portfolio of equal value. Hence, the term “market neutral.” It doesn’t care which way the market jumps.

Arbitrage - There’s a whole range of opportunities that this fund can take advantage of. It could be statistical arbitrage, risk arbitrage, etc…

Leveraged Buy-out - Takes a small amount of cash and buys businesses with vast sums of borrowed money. Pays down the debt and is left with a valuable asset.

So you ask, why am I pointing any of this out?

Because based on current market trends, they will one day buy your business and make a fabulous attempt to rule the world!