Can someone explain in brief about the risks created by leverage and derivatives in Hedge Funds.

Your question is worded a bit ambiguously:This could be interpreted as risks to HF's from using leverage & deriv's.Or, interpreted as risk to the larger markets such as with the LTC blowup.Derivatives are a means of putting a price on risk, and then buying and selling [that risk, independent of buying/selling the underlying].This often has leverage involved, but there need not be a definite relationship between leverage and derivatives:You can have derivatives without leverage, and you can have leverage without derivatives.As for using the term "risk":In the case of long positions in options, the "risk" is loss of theta and possible loss of implied volatility.In the case of short positions in options, there is the risk of exercise.One risk can tend to be more likely, yet more modest.The other risk can tend to be less likely yet more substantial.Which risk are you asking about?As for leverage, as of today, going long in one contract of MSFT Mar.5 call option with a slightly OTM strike price has a premium cost of 10 cents per share, or $10 / contract, which controls the right to potential profits for $2624 worth of MSFT shares, if those shares can rise from $26.24 to a quarter point past the strike price of $27.50, by Mar.5. $10 controlling $2624 worth of shares is considerable leverage, but relatively modest risk (mostly theta).This rather superficial answer is hardly brief, so perhaps the answer to your question "Can someone explain in brief..." would be easier if you could frame the question more specifically.