I believe they are actually so named because the instruments they originally invested in (primarily derivatives) had previously been for hedging positions in cash markets (ie markets on the underlyers) and "hedge funds" were the first funds that just used these "hedge instruments". They always used them primarily for speculation though, not primarily hedging.

What? No. Hedge funds are named for making highly risky investments. The short term risk of doing this is offset by hedging across markets and by using specific investment products. Works great until events like the housing market cause a market wide collapse and kill your hedgefund.

Whoever concentrated the money in such funds was likely corrupt, otherwise grossly incompetent.

Do you work in finance? That's just not true at all.

Hedge funds are a very diverse group (see my above comment about how they are defined by compensation schemes nowadays and not strategies).

The original idea of hedge funds was to provide low volatility (like bonds) and high returns (like equities).