This meant they sold shares they did not own and, if the market prices fell, bought them back at a lower value - to make a profit.
The term 'hedge' was used because the short positions would protect the funds from any fall in the market.
Things have changed, however, and today the label 'hedge fund' is a bit of a misnomer. Michael Steinhardt, one of the pre- eminent US hedge fund managers, says in the book Market Wizards:
'The term now refers to a limited partnership (or an offshore fund) in which the general partner is typically paid on a performance basis, as opposed to more traditional money managers who are paid on assets managed.
'Typically, the manager of a hedge fund has a great deal more flexibility than a traditional money manager, and that is really the key element.'
Investors must typically put at least pounds 100,000 into a hedge fund and can withdraw money only in limited circumstances, to give the managers maximum discretion. Fees are usually 1 per cent of assets and 15 to 25 per cent of profits.