Hedging

Hedging means taking a position specifically designed to offset potential losses in another investment, similar in spirit to buying insurance. An investor or fund might hedge a stock holding by using options or by shorting a related security, so that a loss in one position is partly or fully offset by a gain in the other.

Hedging reduces risk, but it also typically reduces potential upside, since the hedge that protects against losses will also eat into gains if the original position performs well. Funds that describe themselves as fully hedged are generally aiming for more stable, lower-volatility returns rather than the biggest possible gain.