What Is a Hedge Fund?
A hedge fund is a pool of money from both established individuals and large organizations, which is controlled by a hedge fund manager. The hedge fund manager uses various strategies with the goal of generating high returns on the capital.
What Is Hedging?
The name “hedge fund” originates from the practice of hedging, which involves using financial instruments and tactics to reduce risks. Hedging typically involves offsetting investments with opposing positions to act as a safeguard against unexpected market fluctuations, thereby serving as a protective measure for investments.
Prominent hedging methods include futures contracts, options contracts, and short selling. Futures contracts are binding agreements between parties to buy or sell an asset at a predetermined price on a specific future date. They bear resemblance to options contracts, which grant investors the choice to sell or retain an asset at a set price on a
designated future date. Options help investors lock in a selling or buying price, shielding their stocks from unpredictable market swings. In contrast, short selling involves selling an asset in anticipation of its price decline, with the intent to repurchase it at a reduced cost, thereby securing a profit.