thanx chahine
Hedgeing is offsetting risk. for example companies use futures to hedge exchange rate risk. lets say someone owes you 1,000,000 euro in 6 months but you do want to take the risk that the euro is going to drop relative to the dollar in that time, so you would buy a six month euro futrue and lock in a price now. the future is not really an investment but a hedge. Or for another example, if an investor owns a stock, but does not want the risk of it droping considerablly, the investor could buy a put option to hedge the stock risk. if you make an investment to offset risk that you already have then it is a hedge. (but hedge funds are totally different!!)
So like, if you invest money in one industry. Then to make sure if it goes down, you don't lose everything you bet on an industry that traditionally does the opposite of the first? Or like both buying on the long-term and short selling the same stock?
Good answer by McShinko. Options are probably the best and most common examples of hedging. People will often go long with stock and short with options or vice versa. Many people swear by the method. Most investing tradionalists would say it will lower your return over all. Depends on how much money is being managed and for what goals.
ToastMonger- what you said is not necessarily hedging. that is just diversifying. hedging is when you your investments are direct oppisites. (perfect negative correlation)
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