Does it make sense for an investor to utilize the hedging strategy to gain an edge?

Hedging, as the name suggests means safeguarding or protecting. And finance companies in India and over the world have used this meaning to construct an apt strategy that ensures higher returns on your investment. It is a risk management strategy that is used by hedge funds to offset the risk of losses by diversifying your portfolio. In simple words, hedging can be considered as a form of insuring yourself against the negative events that take place in the financial markets. However, this does not mean that you will be insured from any loss that occurs whatsoever. It reduces the negative impact a certain event will have on your investments, helping you preserve your capital and make wealth over time. Now that you know what hedging strategy is, let’s take a deeper dive into this subject and broaden your understanding of hedging.

Hedging is typically done by hedge funds which are formed by individuals with large investment capacities to create financial partnerships and pooling funds together before using a bunch of different investment strategies to safeguard their investments. Unlike other finance companies in India, hedge funds are not completely governed by the authoritative regulatory body SEBI, and can therefore employ different strategies to secure the investments. Since their goal is to maximise investor returns, hedging is generally considered to be more aggressive in approach and is exposed to risks. This is also the reason why investing in hedge funds can only be done by wealthy individuals who can bear the brunt of a loss.

What makes hedging more attractive is the neutral standpoint of hedge funds. They hold a long position on their assets if they expect a rise and short stocks before an impending drop to help them make profits even in unsteady markets. Although this strategy was used to reduce risks, finance companies in India and over the world have strayed away from the traditional meaning of hedging and have started focusing aggressively on making huge profits.

So, although the traditional hedging strategies employed by mutual funds help you safeguard your money with small but consistent returns, you may choose to invest in a hedge fund if you are ready to take risks for better returns.