Hi Bill, my name is Annie Logue; I'm a freelance financial writer, and I have a new book out this week - Hedge Funds for Dummies, the latest in Wiley's For Dummies series.

I know, I know, sign of a market top!

As for me, I have an MBA from the University of Chicago and hold the Chartered Financial Analyst designation. I worked on both the buy side and the sell side for many years, and I now write a lot about finance for different trade publications. I also teach finance at the University of Illinois at Chicago.

My basic premise in my book is that a hedge fund is primarily a business model, that hedge fund managers have a lot of flexibility because of their relatively light regulation, and that investors need to understand that there is no mystique to what hedge fund managers do so that they can make better decisions, starting with whether to be in a hedge fund in the first place.

So Annie, how do you define hedge funds?

A hedge fund is an investment partnership with relatively little regulatory oversight that can invest in a wide range of assets and follow a wide range of aggressive strategies.

Isn't that the same as a mutual fund?

I think people get confused by the word "fund" and think of mutual funds, which are heavily regulated public companies that can't invest in some assets or pursue some trading strategies.

To a big extent, a hedge fund is a business model: the money manager charges an asset management fee and a performance fee, the investor agrees to give up certain forms of regulatory oversight, and both parties agree on an investment strategy. This may work out great for investors who have a lot of money and who need the risk and return benefits that hedge funds offer, but the fees and the lack of oversight may prove too expensive for everyone else.

Shouldn't everybody have access?

No type of investment has a lock on performance, although hedge funds get the headlines. It's like the difference between a private club and the YMCA. You may not be able to get into the private club or afford its membership fees, but you can still get a great workout and meet plenty of interesting people at the Y.

Should investors think of hedge funds as asset classes?

Hedge funds are not asset classes. They are not distinct securities with distinct risk and return profiles. A hedge fund is a lightly regulated private investment partnership.

How does the general partner, who is the manager, charge the limited partner, who is the owner of the capital?

The hedge fund's manager usually charges a management fee of 2 percent of the assets, as well as a performance bonus of 20 percent of the profits, which is much higher than a mutual fund manager.

Saying that you want to diversify into hedge funds may be like saying, "I'm tired of shopping at stores with a 100-percent markup; I want to start shopping at places with a 150-percent markup."

Now, among the thousands of private investment partnerships out there are some that may fit your investment objectives and help you diversify your overall portfolio. But these benefits aren't results of the hedge fund structure; they come from the fund manager's skill and choice of assets.

Are you saying alpha?

Alpha is a term drawn from the Capital Assets Pricing Model, which is an academic theory of how securities are valued. Under that, alpha is performance added from the portfolio manager's skills. It's the performance that the manager adds or subtracts from her intellectual ability, her ability to time the market and make decisions, and her ability to come up with new investing strategies. Each hedge fund has its own way of achieving alpha, and fund managers love to talk about it whether or not they have any interest in the Capital Assets Pricing Model.

But in theory, alpha is zero. The market is huge and efficient " not perfectly efficient, but pretty close, especially over the long haul. That means that no investor can get a consistent advantage over the market. If alpha does exist, it can be positive or negative — in other words, the fund manager could be subtracting value from the fund. Positive alpha isn't as common as most hedge fund investors would like to think. I'm not saying it doesn't exist, or that some fund managers haven't figured out a way to beat the market consistently.

Just remember: Anyone who has really figured alpha out isn't getting up and going to work every day.

Are you saying that he or she may even call themselves retired? (lol)

As much as hedge fund managers and investors want to believe that alpha can be achieved, thrive, and generate consistent profits, the success is probably a short-term opportunity. Good fund managers know this and adapt to changing markets.

What kind of risk do hedge funds have?

You know, it just depends. Hedge fund traders, the people who trade securities for hedge funds, are go-go people. They make crazy trades in exotic securities; they often drive fancy cars; and, as I like to say, they have mouths that need washed out with soap. Their goal is to get extra return so that they can collect their bonuses.

Sometimes they tick off people on the other side of the trade when they succeed — including national leaders, corporate executives, and stock-exchange officials. These unhappy folks badmouth hedge funds and leave the casual observer with the idea that hedge funds are wild and crazy investments.

Are they all ‘wild and crazy'?

Some managers run hedge funds to maximize investment return relative to market performance, but others design funds to generate returns within a narrow band, say 7 percent to 9 percent, with very little variation, by eliminating market risk. These traders on these funds (the people who trade securities for the hedge fund) may be just as crazy, but they trade to insure their funds' returns to capture big profits.

So, not all hedge funds are risky, but not all hedge funds hedge, either. You can't make the assumption that an investment partnership called a "hedge fund" actually hedges. The first fund, set up by Alfred Winslow Jones, was a private partnership that charged a management fee and a 20-percent bonus paid out of performance. It also hedged risk by buying securities it expected to go up and selling short shares it expected to go down. In other words, Jones had a unique business structure and a unique investment strategy in his hedge fund. Nowadays, investment partnerships that call themselves "hedge funds" keep the business structure but not necessarily the hedging strategy.

Sounds like some hedge funds are not really hedgies.

A few months ago, I heard of a manager who claims that he's running a hedge fund. His strategy? Borrowing plenty of money and using it to buy shares in the ten largest technology companies. If technology performs well, he'll make a fortune for himself and his investors. If tech stocks go down, though, he still has to repay his loans, which will magnify his losses. His strategy carries astronomical risk without hedging in any sense of the word.

What kind of performance do hedge funds get?

The stark reality is that many hedge funds don't perform well. You don't hear about these funds, because hedge funds don't have to report their results. (A lot of fund managers and their investors like that, because that lets them stay under the radar.) And when a fund does perform well, the fund manager's cut of the profits may bring the returns down to the same levels that mutual fund investors receive.

Hedge funds are like any other type of investment — some do well, and some don't. The label of the investment has nothing to do with its performance.

Are there tax implications?

Hedge fund managers often invest without concern for the tax implications of its investment positions, and that's perfectly fine for major hedge fund investors, because they don't pay taxes. These tax-exempt investors are pension funds, university and institutional endowments, and charitable foundations. For them, the aggressive and offbeat investment techniques that some hedge funds use are a perfect fit, because they don't have to worry about the friendly revenue collector taking the profits away. If you're working for a large tax-exempt investor, it makes sense for you to investigate hedge funds as a way to increase your overall rate of return. But if you're an individual, you need to be really careful.

Thanks, Annie. Given that there are a lot of us "Dummies" who need to know more about these hedge funds, perhaps some of my readers will give your sales a boost. Any Wiley book would be in all the bookstores and of course available at Amazon.

Good luck with your book. I look forward to reviewing it.

We have something in common, by the way. I too have been on the buy-side and the sell-side, and been a writer. And as my readers know, I'm planning my own hedge fund " hey if CNBC's Ron Insana can do it, why not me? To top it off, I'm writing my own book " something about my life in the trenches of the capital markets " a series of anecdotes, lessons I learned, and the take-away for students-of-the-market, even some calling themselves Dummies and some running hedge funds.

I'm trying to get it all done before I have to go back to being a full-time dummy.