The term "hedge" implies risk reduction.

A recent hedge fund cost study conducted by Cliffwater LLC found that the typical hedge fund levies a total annual cost of 3.53%, equal to 32% of expected gross profits when it weighed outcomes by their likelihood of occurence (source:  Pension & Investments, 2/7/2011).

Additionally, the study ignored the potential that hedge fund investors may pay a performance fee despite negative returns due to "clawback" provisions which allow a fund to recapture a greater performance fee in good years to make up for bad years ("heads they win, tails you lose").

That leads to the inevitable question:  how can hedge funds really "hedge" (ie, reduce risk) if they have to post 1/3 greater profits just in order to break-even?

The answer is "they can't and they don't."  In fact, most hedge funds utilize leverage (borrowed money), derivatives, and/or other risky strategies in an attempt to inflate their returns.

A headline in the same issue of Pensions and Investments (02/07/2011), reads:  "Funds pump 55% more into hedge fund strategies."