Hedging is an important investment strategy employed to reduce risk in one’s portfolio by spreading out the risk of loss between multiple assets. Think of hedging as an insurance policy for your investment. The theory is that when asset A experiences volatility, asset B may perform well enough to offset a portion of your loss.
Many savvy investors use futures contracts, options or short positions to protect their underlying asset. Another common hedging practice is to allocate a portion of your funds to high yielding financial instruments, commodities, or real estate to combat the effects of rising inflation.
