What is a hedging?

A hedge is an investment done with the goal of reducing the risk of adverse price movements in an asset. A hedge is an investment in a security that correlates well with the asset to be hedged. How Does Hedging Work? Hedging is an effective tool that provides protection against downside risk in times of uncertainty.

How do investors hedge one investment with another?

Put another way, investors hedge one investment by making a trade in another. Technically, to hedge requires you to make offsetting trades in securities with negative correlations.

What is the best hedge against downside risk?

Hedging is an effective tool that provides protection against downside risk in times of uncertainty. The most common hedge is the famous 60/40 stock and bond portfolio held by retirement savers. Every kind of diversification is a hedge in a way.

Does hedging mean you won’t lose value?

However, hedging doesn’t necessarily mean that the investments won’t lose value at all. Rather, in the event that happens, the losses will be mitigated by gains in another investment.