Hedge funds exist to manage risk. Suppose I offered you a choice of either a guaranteed 10 million dollars, or a 50% chance to win 20 million dollars, which wou

Hedge funds exist to manage risk. Suppose I offered you a choice of either a guaranteed 10 million dollars, or a 50% chance to win 20 million dollars, which would you choose? Probably option one, now suppose I slowly increase the dollar amount of option two, at what point would your choice flip to the second option? That point will not be the same for everyone, and its expected value minus 10 million is called the risk premium. Because of the decreasing marginal utility of money, many wealthy people are interested in capital preservation, in other words, they're willing to underperform the market if it means a significant reduction in volatility. Hedge funds can provide this type of service.