First big options trader was Russel Sage, the instrument were called privileges at the time, late 19th century into the very early 20th century. Hedge funds and Hedging have little to do with each other besides that both can involve derivatives, leveraged speculative contracts. Hedge funds took off in the 1990s after a quite rise in the 1980s. SEC Regulation D is what set off this economic catastrophe from the USA to the world. Reg D was implemented to enable venture capital. Proprietary traders like Paul Tudor Jones had been doing speculative trading in financial derivatives since the 1970s using various often offshore locations to base the supposed business presence. Reg D was intended to fund startups with a nice help to the manangers who took the risk to carry forward their gains from one successful project to the next tax free as a balance to the frequent losses. The carryforward amount only gets taxed when it exits the investment fund. The Prop Traders kept the carry tax break to them selves and passed their monthly wins and losses over to their investors, in the 1990s long term capital gains got a lower tax rate and a new scam arose where these and so called private equity funds passed all gains, even short term trading gains over to the investors as long term capital gains this exploded the Hedge fund scene and are at least partially responsible for the crashes of 1997, 1998, contributed to the dot com bubble and pop, and the early 2000s real estate bubble and pop and on to our current tax cut fueled bubble. The joke is Hedging is supposed to reduce risk exposure While Hedge Funds are risky and speculative with the incentives for the investor and manager misaligned, the only hedge these funds provide to an average rich person is it balances the conservative take most fund manager's take with investment funds. Hedge funds also often use more leverage than a retail investor is allowed to.