Hedge


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Related to Hedge: hedge fund, hedge bets

Hedge

A transaction that reduces the risk of an investment.

Hedge

To reduce the risk of an investment by making an offsetting investment. There are a large number of hedging strategies that one can use. To give an example, one may take a long position on a security and then sell short the same or a similar security. This means that one will profit (or at least avoid a loss) no matter which direction the security's price takes. Hedging may reduce risk, but it is important to note that it also reduces profit potential.

hedge

A security transaction that reduces the risk on an already existing investment position. An example is the purchase of a put option in order to offset at least partially the potential losses from owned stock. Although hedges reduce potential losses, they also tend to reduce potential profits. See also perfect hedge, risk hedge, short hedge, special arbitrage account.
Case Study A hedge that limits potential losses is also likely to limit potential gains. In May 1997 Georgia entrepreneur and billionaire Ted Turner entered into an arrangement whereby Mr. Turner had the right to sell four million of his Time Warner shares to a brokerage firm at a price of $19.815 per share. At the same time the brokerage firm acquired the right to buy the same four million shares at a price of $30.45. This particular hedge, called a collar, established a minimum and maximum value for four million shares of Time Warner owned by Mr. Turner. In other words, the former owner of the Atlanta Braves, Atlanta Hawks, CNN, and superstation WTBS acquired the right to obtain at least $19.815 per share by agreeing to give up any increase in value above $30.45. Time Warner stock subsequently skyrocketed when America Online acquired the firm at a price nearly triple the $30.45 stipulated in the agreement. Thus, the hedge ended up costing Mr. Turner approximately a quarter of a billion dollars. On a positive note, the four million shares represented less than 4% of Mr. Turner's total holdings of Time Warner stock he had acquired when the firm bought his Turner Broadcasting several years earlier.
References in periodicals archive ?
Accuracy of information reported by managers is not necessarily audited or independently verified and may not represent all hedge funds.
Treasury departments don't trade but hedge, so spending the time to understand your enterprise-wide exposures is the first step before you can even put on your first hedge.
446-4(e)(4), gain or loss from a hedging transaction "must be accounted for by reference to the terms of the debt instrument and the period or periods to which the hedge relates.
GIVEN THE COMPLEXITY OF SELECTING AND MONITORING a hedge fund, CPAs should recommend clients commit assets only after doing thorough research.
This is the first in a series of hedge fund replication indices Merrill Lynch Research plans to launch that mechanically implement strategies commonly employed by actively managed hedge funds.
In a case study of GM's practice, Desai noted that GM's policy was to hedge 50 percent of these exposures with forwards in months one through six and options in months six through 12.
133 was issued, accounting was more forgiving of hedge designs that were less than perfect, since ineffectiveness was generally deferred into the hedged item until the transaction being hedged was complete.
Hedge funds also buy coverage, most notably financial institutions policies such as errors and omissions coverage.
When it came to the final steps of executing hedge trades, most companies worked with their bank, either trading online or by telephone.
weather derivatives used to hedge general business revenues, rather than the price risk of a specific ordinary asset or liability) and;
When an investor looks at a hedge fund, one thing her or she must look for is consistent performance--a consistency that adds some sort of balance to this high-flying, high-risk industry.