The term "hedge fund" refers to the classic hedge fund model of "hedging bets" on the market by purchasing options or simultaneously going "short and long" at the same time, so that the hedge fund will make money no matter what direction, up or down, the investment's value goes.
Easier said than done.
Today, in the US, hedge funds invest in everything from international bonds to equities to energy to sub-prime mortgages. They're usually restricted to very wealthy investors or large financial institutions such as pension funds, insurance companies, banks, etc. They're essentially unregulated, unlike mutual funds or investment advisors, who have to follow stricter regulations.
Usually they require a minimum net worth in the multi-millions, and a personal income well into six figures. They generally charge 2% of the initial investment as a management fee and 20% of the gains.
Their strategies tend to be very high-risk and they use lots of leverage (borrowing) to amplify returns (which also can amplify their losses). They can make or lose huge fortunes in an afternoon.
"Selling short" means, basically, to sell an investment before you own it. You "borrow" the stock, sell it, and hope to buy it at a later date, when it's gone down in value. The nice person who's lending you the stock is betting that the opposite will occur, and that you'll owe them money instead.
Say a stock trades at $45 per share. For whatever reason, you're pretty sure it'll go down in value in the next six months. You call a broker, borrow the stock, and sell it, pocketing $45. Then, a few months later, the stock goes to $35 per share. You buy it at that price & return it to the broker, keeping the difference, which is your profit - $10. Nifty, eh? If the stock instead goesto $55 per share, you'd have to buyit at that price, losing $10 per share.
In practice, few people can sell short in the classic sense, which is to borrow it without owning it, or a "naked short." Most shorts will instead buy a "put option," which confers the right, but not the obligation, to sell the stock at a certain price and time to another, without owning it. In return, the person who takes the other side of this bet is betting it will go up, instead, and will pocket the option premium.
Options are a bit like insurance. If you total your car, you can force the insurance company to buy it from you, although its value has gone down considerably. In life insurance, your spouse "puts" your life to the insurer, even though you won't earn any more $$.