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Hedging is The best way to understand hedging is to think of it as insurance.Portfolio managers, individual investors and corporations use hedging techniques to reduce their exposure to various risks In financial markets, however, hedging becomes more complicated than simply paying an insurance company a fee every year Hedging against investment risk means strategically using instruments in the market to offset th e risk of any adverse price movements In other words, investors hedge one investment by making another Technically, to hedge you would invest in two securities with negative correlations.If the investment you are hedging against makes money, you will have typically reduced the profit that you could have made, and if the investment loses money, your hedge, if successful, will reduce that loss.According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost.

Hedging is The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it every day. Portfolio managers, individual investors and corporations use hedging techniques to reduce their exposure to various risks In financial markets, however, hedging becomes more complicated than simply paying an insurance company a fee every year Hedging against investment risk means strategically using instruments in the market to offset th e risk of any adverse price movements In other words, investors hedge one investment by making another Technically, to hedge you would invest in two securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of insurance in one form or another Although some of us may fantasize about a world where profit potentials are limitless but also risk free, hedging can't help us escape the hard reality of the risk-returm tradeoff The risk return tradeoff is a Higher risk is associated with higher return and lower risk with lower return. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost. A reduction in risk will always mean a reduction in potential profits. So, hedging, for the most part, is a technique not by which you will make money but by which you can reduce potential loss. If the investment you are hedging against makes money, you will have typically reduced the profit that you could have made, and if the investment loses money, your hedge, if successful, will reduce that loss.