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Hedge what?

Talking about hedge fund, the first question usually is 'hedge what?' or what is hedging?

I do not think it should necessarily be a unified answer, but from my point of view, the 'hedge' here is absolutely to hedge from risks.


Hedge fund should be a way of protect your wealth from being ruined by accidents. Someone may do it by making a lot of money one day and lose comparingly less another day. But I would consider a long/short strategy a best representative for a concept of hedge fund.


Hedging is a way of survive. When you get used to it you think everything in this way, which is no bad at all.


If you are someone invest in US stocks you may have noticed that some sector ETFs make better performance in the past 11 months. i.e. NAIL, a 3 times bull ETF for home builder index, has advanced others far front. Meanwhile, if you happened to be a homeowner in USA, you may have also noticed that the home value has been declined during the same period. If you bought some NAIL, or ITB as the leveraged ETF is arguably designed for short term trading, right after the day you bought your house, the home value decline would have been hedged by the appreciation of the ETF you bought. The rational is that when too many houses are being built the sector ETF goes up while the average value of the houses decline. You can find many correlative things around that can be used as a hedger to each other.


Of Course, in the field of investment management, you want the portfolio appreciate its value but want to hedge the scenario when it doesn't. If you do it well you may end up staying invested longer without losing your faith in the extreme situation where you give up due to risk avert fear.



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