Hedge Position

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A hedge is an investment that is used to lower the risk of an overall portfolio. A good hedge will retain or appreciate in value when other positions in the portfolio decline in value, lowering the impact of adverse price movements. However, a hedge will generally lower returns when the primary position performs well.

A hedge is often executed by using derivatives to take an opposite position as an investment in the larger portfolio. Alternatively, a less direct hedge can be achieved through diversification. Holding assets with low or negative correlations will reduce a portfolio’s overall risk.