Hedging
Taking an offsetting position to reduce a specific risk, trading away some potential upside in exchange for protection against a particular loss.
Hedging is buying a form of insurance against a risk: holding an asset or position that tends to rise when the thing you own falls, so the two partly cancel. Gold or defensive positioning can play this role at times.
A hedge is rarely free: it usually costs a little return in calm periods in exchange for a cushion in stressed ones. The aim is not to remove risk entirely, which is impossible, but to shape it into something an investor can live with.
Related terms
- DiversificationSpreading capital across assets that behave differently, so weakness in one is offset by others. It reduces avoidable risk but does not remove market-wide risk.
- DrawdownThe decline from an investment's most recent peak to its subsequent trough, in percent. It is a direct measure of pain endured, and of the gain needed to recover.
- Asset classA broad category of investments that behaves distinctly (equities, bonds, gold, commodities): the building blocks of a diversified, tactically allocated portfolio.