What is a Hedge fund and how is it different from a mutual fund?
A hedge refers to a position taken by an investor to reduce risk related to the price movements of an asset. An investor hedges against risk by taking an offsetting position in the market for related securities. Since it is impossible to eliminate the risk completely associated with security, investors can only try to lessen it by taking opposing positions in the market. Investors use derivatives to hedge against uncertainties in the market. Derivatives are contracts that hold an underlying real asset like a stock. To better understand the working of a hedge, an example would be helpful.
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