Hedging

Hedging can be part of the Investment Strategy for a Stock Portfolio. Hedging often involves reducing exposure to the Stock Market via derivatives, selling Futures or buying Put Options or Diversification.

When a Hedge position is incorporated into a Stock Portfolio, an Offsetting Position has been opened to counterbalance the Long Positions. The Stock Market can be negatively impacted by unforeseen events, sharp drawdowns that do not discriminate. The objective in Hedging is to limit the impact of these drawdowns. A hedge can be implemented in several ways. Firstly, by buying a Stock that is an offsetting position due to a low level of correlation, or Diversification. Secondly, a Hedge can be by Short Selling a Stock. The Long and Short positions combined, should reduce the overall market exposure. Thirdly, a Hedging Strategy can be opened via Derivatives, Futures or Options. Short selling of Index Futures will reduce the overall Market or Beta risk in a portfolio. Or simply buy a Put Option.