A hedge is an investment2 to balance out an investment1, so that you are not exposed to the risk in investment1. For example, you are a gold mine. The price of gold is volatile, and you want to focus your attention on mining gold, not watching the gold price. So you hedge your production of gold, by selling forward in paper trades. (I.e. you would typically not deliver the physical gold you have sold.) So now you are certain what your income will be in the future, for each ounce you sold.
Then as you actually produce the gold, you enter into physical sales, and simultaneously a paper purchase. In this manner your purchase and sale leaves you net in the same position.
You "cancel" the paper purchase and sale, and deliver the gold to the physical contract.
That is in very simple terms, what a hedge is. A Hedge fund is a fund that invests in these kinds of paper contracts, because they are willing to accept and manage the (price) risk, while leaving the mines to concentrate on what they are best at.
There are a wide variety of funds, with different strategies. They are not inherently risky funds, but because these contracts can be highly leveraged, the potential for big profits is equalled by the potential for big losses. If they are not properly *hedged* themselves.