🛡️ Hedging & Risk Management

Learn how to protect your portfolio and manage risk through hedging strategies.

Introduction

Hedging and risk management are about protecting investments from adverse market movements.
This strategy focuses on reducing downside risk while maintaining exposure to potential gains.

Core Principles

  • Diversification: Spread investments across asset classes to reduce risk.
  • Hedging Instruments: Use options, futures, or inverse ETFs to offset losses.
  • Risk Assessment: Identify and measure potential risks before investing.

How It Works

  1. Assess Portfolio Risks: Identify exposures to market, sector, or currency risks.
  2. Select Hedging Tools: Options, futures, or ETFs can provide protection.
  3. Balance Costs vs Benefits: Hedging reduces risk but may limit upside.

Advantages

  • Provides protection against market downturns.
  • Helps stabilize portfolio performance.
  • Encourages disciplined risk management.

Risks

  • Costs: Hedging strategies can reduce returns due to fees or premiums.
  • Complexity: Requires knowledge of derivatives and risk models.
  • Imperfect Hedges: Protection may not fully offset losses.

Famous Advocates

  • Nassim Nicholas Taleb: Author of The Black Swan, emphasizes risk management and tail risk protection.
  • Ray Dalio: Founder of Bridgewater Associates, known for risk‑parity strategies.

Conclusion

Hedging and risk management are essential for long‑term investors.
They provide stability and protection, ensuring portfolios can weather market volatility.