Concept of Hedging Investments

Hedge funds are a type of collective investment catering to the very wealthy as a means for them to increase their chances of earning greater profits while lowering risk. A hedge fund manager is the person who oversees the hedge fund and takes proactive methods to hedge the investment strategy.

Strategies of hedge funds

One such measure a hedge fund manager may implement to hedge and investment is short-selling. Short selling is when the seller sells a financial instrument they do not own at the time of the sale with the intent of buying it later at a significantly lower price. That is one of the most common strategies utilized when it comes to hedging investments.

The development of hedge funds

The basic concept of hedging investments was developed by Alfred Winslow Jones. Jones was a sociology student who was working on his thesis on industrial relations. He later took that concept and turned it into a book which was picked up as a story in Fortune. That article later helped him land a job at the magazine and that experienced prompted Jones to launch his first hedge fund in 1949.

His concept of hedging investments back still translates to the basic unobtainable core value of  “profit without risk.”  New York said Jones “… split his holdings into two groups: good stocks that rose faster than the market in good times and fell slower than the market in bad times, and bad stocks that did the opposite.” As great as the philosophy was, it was not a sure thing and Jones eventually admitted that even he could not “outsmart the market.”

Conceptually, hedging investments is trying to mitigate the chance of financial loss by taking unusual and risky steps to increase the chance of great financial games. Hedge funds are not an investment for those who are low on cash or scared of risk taking.

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These articles are written by the in-house GOBankingRates team.