Hedger - Definition and Overview

A hedger describes a financial investor who takes up opposing positions in order to reduce risk. For example, a fund manager may invest in a portfolio (finance) of leading shares from the London Stock Exchange. If the market as a whole goes down, this portfolio will suffer even though the companies selected may be good.

The fund manager can hedge this risk (called market risk) by selling short futures contracts on the FTSE 100 index. The exact mechanism is not so important as is the fact that the hedging position will make money for the fund if the index goes down in value.

This profit can be used to offset the losses in the portfolio, while the fund manager takes the profit or loss relating from the difference between the market's performance (captured by the hedging position) and that of the portfolio. This figure is similar to the fund's beta, or performance relative to the general market.

See also

• hedge fund
• spread