Hedge funds are actively managed pooled investment funds — which might not make a lot of sense if you’re not an experienced investor. It’s also not the most helpful definition if you’re trying to explain hedge funds to your 12 year old.

Fortunately, there’s an easier explanation that can still get the basic point across. GOBankingRates gave ChatGPT the following prompt: “Explain hedge funds like I’m 12.”

Here’s what came back.

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This is how ChatGPT explains hedge funds to someone in the seventh grade: “Imagine you have a big piggy bank, but instead of keeping your allowance in there, you want to make it grow. You could put it in a regular savings account, but the money doesn’t grow very fast. So, you ask some really smart people, let’s call them hedge fund managers, to help you.”

ChatGPT called these hedge fund managers “professional money-growers.” It explained that these people “take your money and try to make it grow by using all sorts of smart tricks and strategies.”

Some of these strategies, according to ChatGPT, include:

• Buying things (like stocks or real estate) that might become more valuable.

• Selling things that might lose value (AI describes this a bit like “betting that something will go down in price”).

• Using borrowed money to make bigger financial moves than what you could do with your own money.

“Hedge funds are a bit like a secret club,” ChatGPT added. “Only people who have a lot of money can join, and sometimes the managers take a cut of the profits for themselves, like a reward for doing a good job.”

ChatGPT also mentioned that there’s some risk involved with hedge funds — though it didn’t go into detail as to what those risks might be.

“If the hedge fund manager makes bad choices, you could lose some or all of your money. So, it’s like giving your money to someone with a lot of experience to try to grow it — but it’s not guaranteed that you’ll make money.”

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Talk of a piggy bank might not appeal to all 12-year-olds, but ChatGPT did give a very simplified definition of hedge funds.

Hedge funds can bring about high returns. Goldman Sachs found that hedge funds are in high demand and have seen returns increase from 4.8% to 9.3% from 2020 to 2024.

As ChatGPT indicated, there is also risk involved. Mismanagement of funds and market volatility are just a few areas that can impact the overall performance.