Hedging Strategies
Hedging is a practice followed by investors to safeguard their investment against market fluctuations. The term hedge fund is used to indicate a 'hedge' against investment deterioration.
When we pay an insurance premium for a new house, we hedge against unforeseen negative events. We can't prevent a negative event from its happening but by hedging, we can reduce its impact on our investment.
Hedging aims at maximizing the return on investment with minimal risk.
Hedge fund managers use a wide variety of different investing strategies to achieve this goal and generally these strategies are managed and executed by a portfolio manager.
Hedging is very popular in wide investment instruments like stocks/equities, derivatives and commodities.
Short selling is one such hedging strategy where an investor makes a short position on a falling stock and makes profit out of it. In short selling, investor borrows a contract from a broker and sells it at the market price with the understanding that it must later be bought back (hopefully at a lower price) and return it back to the broker. Difference in the selling and purchase price goes to investor as a profit.
This strategy is very useful in scenarios when a commodity price falls very sharply due to some unforeseen circumstances, e.g., due to natural disaster like cyclone or due to US jobless report came out in the media or could be due to inventory pile up.
Hedging is the practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the future market. A long hedge against the possible risk of rise in stock price refers to buy position in future market when a sell is already made on a similar stock. In the same way, short hedge refers to selling a future contract when a similar contract is already bought and market is showing a downtrend.
Hedging is a practice followed by investors to safeguard their investment against market fluctuations. The term hedge fund is used to indicate a 'hedge' against investment deterioration.
When we pay an insurance premium for a new house, we hedge against unforeseen negative events. We can't prevent a negative event from its happening but by hedging, we can reduce its impact on our investment.
Hedging aims at maximizing the return on investment with minimal risk.
Hedge fund managers use a wide variety of different investing strategies to achieve this goal and generally these strategies are managed and executed by a portfolio manager.
Hedging is very popular in wide investment instruments like stocks/equities, derivatives and commodities.
Short selling is one such hedging strategy where an investor makes a short position on a falling stock and makes profit out of it. In short selling, investor borrows a contract from a broker and sells it at the market price with the understanding that it must later be bought back (hopefully at a lower price) and return it back to the broker. Difference in the selling and purchase price goes to investor as a profit.
This strategy is very useful in scenarios when a commodity price falls very sharply due to some unforeseen circumstances, e.g., due to natural disaster like cyclone or due to US jobless report came out in the media or could be due to inventory pile up.
Hedging is the practice of offsetting the price risk inherent in any cash market position by taking an equal but opposite position in the future market. A long hedge against the possible risk of rise in stock price refers to buy position in future market when a sell is already made on a similar stock. In the same way, short hedge refers to selling a future contract when a similar contract is already bought and market is showing a downtrend.
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