Hedging is an investment strategy undertaken at
turbulent times to offset risk. Hedging is often employed as an
insurance against impending loss. People hedge usually in futures
trading. Let us learn more about this great investment strategy.
Investors
employ this strategy when they are unsure about how the market will
react.This strategy is used as a reaction against potential loss.
Hedging often accompanied by short selling. Hedging is often seen as an
Insurance by Investors. For example when you insure your house against
fire or theft you are not preventing theft and fire but reduce the risk
or loss of property. Like wise You hedge to reduce the risk in the
event of negative impact. Portfolio managers and investors use this
techniques often.
Though
hedging seem to be an easy method, it requires great vision and
knowledge about the various investment instruments. You have to hedge
properly in instruments that offset your risk. A portfolio manager has
an enviable job here choosing the investment and hedging strategy.
There
are various techniques or directions used in the hedging. You can
hedge short equity positions against long equity positions. For example
if you enter in to the futures contract of buying long you would hedge
this transaction with selling short method.People who invest in
developed markets would hedge with investments in emerging markets like
India. Hedging also follows the sector preferences. Investment in one
sector is hedged with investment in another sector.
There
are people for and against hedging. People love it because it helps
them to reduce their risks. People against it are people who want to
use every opportunity to make money positively. They argue hedging is
not a investment strategy to make more profit but a strategy to reduce
loss.
Hedging
as like everything else does come with a price. You have to pay a
minimum fee for this strategy. Hedging is often related to derivatives.
It often happens in futures and options which we will discuss
separately.
