Where's the hedge?

The Amaranth fiasco and implosions at other hedge funds raises an interesting question for hedge funds. Where's the hedge?

Hedge funds were originally designed as a lower risk alternative to mutual funds. Mutual funds were primarily long investment vehicles and thus were susceptible to extended downturns in bear markets. Hedge funds allowed both long and short positions in stocks. The short positions were supposed to benefit from bear markets and thus act as a "hedge" to reduce the risk of the investment portfolio.

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