Exactly?

A very smart/savvy person (or an idiot snake oil salesman, who portrays as an expert) has a plan to invest money in a certain way to get larger gains (hopefully) than just playing the market the traditional way.

That person creates a hedge fund, and offers investors to join. Usually this is a private affair, and the HF is a private company itself. So it's invite only, average Joe will not be able to invest with the HF usually.

It's the investors who supply the capital. They bring all the money into the management of the hedge fund. Then the Hedge fund and it's MDs and other employees, they take that money and use the strategy the creator/owner had in mind and they try to make those gains.

HF makes money themselves from their internal capital being invested and seeing gains and profits. HF also makes money of it's investors and their gains, through taking fees for those assets under management.

That's basically it. Technically you can start your own hedge fund if you wanted to, out of your garage. But you'll have to either have millions/billions of your own money to start with, or you'll have to convince millionaire/billionaire types to give you their money to manage. That's the main obstacle that makes it extremely tough to start a HF. Because no one knows you, no one trusts you with that insane wealth.

But when you get to someone famous and trusted, like Madoff.. he was able to scam the whole world for a couple decades because everyone trusted him, he was super respected in the industry. So no one looked at the numbers too closely. They just gave him their money and thought they were making insane profits.

It's a method of investing where your broker hedges an investment by making trades in another. Put another way, it exists to limit risk while maximizing gains. If everything works out in the market, which is a big IF.

By fooling the newbie traders

Better q for explain like I'm five. A hedge fund combines the assets of investors and make gambles, but like... when you're big enough you can kind of throw your weight around. If Berkshire Hathaway likes a fund that might make it go up anyway. If hedge funds gather like vultures and bet on the death of a weakening company they might die faster. So it opens options a retail investor doesn't have.

Ostensibly the people in charge are mucho smarto, but often buying an index fund would have been better or just as good. Depends on if the major incidents were predictable (recession because employment numbers for last two years, or recession because COVID/aliens/civil war in Sweden?), and if hedge fund managers predicted it early enough to be ahead of others, and if they did it in a way that other factors don't muddy the waters.

My corporation split in two, once. One of the companies was more like supply chain and the other was more dependent on energy industry trends. Investing in what we used to be would have been fine. We went up. But if energy went sharply up we went a bit up, and if supply chain stuff got tough we only went a bit down. Now you could make a purer bet on a single trend without having to consider the other impacts as much. Things like that.