Natural Hedge

What is a Natural Hedge?

Author: Christy Grimste
Christy Grimste
Christy Grimste
Real Estate | Investment Property Sales

Christy currently works as a senior associate for EdR Trust, a publicly traded multi-family REIT. Prior to joining EdR Trust, Christy works for CBRE in investment property sales. Before completing her MBA and breaking into finance, Christy founded and education startup in which she actively pursued for seven years and works as an internal auditor for the U.S. Department of State and CIA.

Christy has a Bachelor of Arts from the University of Maryland and a Master of Business Administrations from the University of London.

Reviewed By: Adin Lykken
Adin Lykken
Adin Lykken
Consulting | Private Equity

Currently, Adin is an associate at Berkshire Partners, an $16B middle-market private equity fund. Prior to joining Berkshire Partners, Adin worked for just over three years at The Boston Consulting Group as an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate.

Adin graduated from Yale University, Magna Cum Claude, with a Bachelor of Arts Degree in Economics.

Last Updated:September 15, 2022

Hedge is a term used in trading that simply means opening a position in order to reduce risk. This is usually done by either buying an asset that moves in the opposite direction to your main position, or by taking the opposite position in a correlated asset (such as a derivative).

For example, if the portfolio of an investor is fairly correlated to the health of the economy, they may take out positions in gold (which usually rises if the economy is doing badly) to hedge their risk.

Hedging is used to reduce risk and is typically done through the use of derivatives such as options and futures, although it may be done using other assets (i.e. gold, government bonds).

A perfect hedge will mean there is zero risk in holding a position (or a combination of positions) although this is extremely hard to obtain as very few assets are perfectly correlated or move exactly the same amounts.

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