A hedge is an investment used to reduce an individual or entity’s risk of exposure to adverse price movements. It is an insurance policy that protects an investor against the downside risk associated with an investment in a particular security.
A car manufacturer may hedge its exposure to fluctuations in the price of steel by purchasing a futures contract that will allow it to purchase steel at a fixed price over a specific period of time. This is attractive to the car manufacturer because it is able to project a stable budget over this period of time and reduce its exposure to a spike in the price of steel, which would result in a spike in its cost of production of a vehicle.
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested.
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