Hedging: insurance paid for with return
beginner
Automated material · TradeAlmanac editorial deskDraft prepared by a language model from our stored data; not reviewed by an editor.
Hedging means opening a position that profits in the scenario where the main position loses.
The classic example
An exporter knows they will receive foreign currency in six months and fixes the sale rate in advance. They give up a possible gain on a favourable move in exchange for certainty.
The key property
A hedge does not raise expected return — it lowers it. The price of less uncertainty is paid in return, and there is no other way.
Where private investors go wrong
Hedging direction rather than risk. Opening a short against your own portfolio "just in case" is not a hedge but a second bet requiring you to time it.
Hedging with the wrong instrument. Protecting an equity portfolio with an index future works only to the extent the portfolio resembles the index — Beta: how closely a security repeats the market.
Forgetting the cost of the hedge: it costs money continuously and helps rarely.
Simpler alternatives
Reduce the position. Raise the share of instruments that behave differently. Extend the horizon so interim swings stop mattering — The horizon: the one parameter you cannot change by deciding to.
For most private portfolios those three are cheaper and more reliable than any derivative.
Related: Futures: an obligation, not an option.
Related instruments
Draft prepared by a language model from our stored data; not reviewed by an editor.
Model: claude-opus-5
How we use language modelsSimilar articles
- The secondary market for DFAs: why the asset never leaves its own platformA DFA can be sold before redemption only inside the platform where it was issued, and only through an exchange operator listed in the Bank of Russia register. Why the asset cannot be moved to another operator, how selling it differs from placing an order in a bond's order book, and what the sale changes in the purchase limit and in the tax.
- Terms of Trade: How the Ratio of Export to Import Prices Moves the Rouble and ProfitsThe terms of trade are the ratio between the prices at which a country sells its exports and the prices at which it buys its imports.
- TWAP order: the algorithm slices volume by time, not by liquidityA TWAP order (time-weighted average price) is an instruction to the trading system: take a large order, break it into a stream of small child orders and release them in equal portions at equal intervals until the end of a set window.
- The Impossible Trinity: What a Central Bank Pays for a Fixed Exchange RateThe impossible trinity is the proposition that, out of the set of goals "fixed exchange rate", "free movement of capital" and "independent interest rate", a state can hold any combination except the complete set.