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Investment Dictionary


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Hedge (Hedging)

 

Hedge (hedging) is protection of investment portfolio against fluctuations using financial instruments. Hedge is very popular at investment theory, but not so popular at investment practice. In theory everything looks very nice, the risk and beta of the portfolio reduces with some little extra costs for hedging. However, in practice this is not so perfect. If not to mention some fundamental diversification in investment portfolio, which is not truly hedging, other most available choices are options and futures. The costs of options are quiet high and if you will use them all the time to protect you investments they will erode your return by little. The costs of futures is more appropriate, but it is an obligation for both sides and it will take the profit from you as well. 

 

Though, hedge instruments may be used of investors for short period, or is proper to use for financial or other institutions, for which the stability and safety is the first priority. 

 

 






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