Perfect Hedge

AAA

DEFINITION of 'Perfect Hedge'

A position undertaken by an investor that would eliminate the risk of an existing position, or a position that eliminates all market risk from a portfolio. In order to be a perfect hedge, a position would need to have a 100% inverse correlation to the initial position. As such, the perfect hedge is rarely found.

INVESTOPEDIA EXPLAINS 'Perfect Hedge'

A common example of a near-perfect hedge would be an investor using a combination of held stock and opposing options positions to self-insure against any loss in the stock position. The cost of this strategy is that it also limits the upside potential of the stock position.

RELATED TERMS
  1. Howard-D'Antonio Strategy

    An algorithm designed to maximize the expected return of a portfolio. ...
  2. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  3. Hedge Ratio

    1. A ratio comparing the value of a position protected via a ...
  4. Naked Position

    A securities position that is not hedged from market risk. Both ...
  5. Pairs Trade

    The strategy of matching a long position with a short position ...
  6. HedgeStreet

    An internet-based, government-regulated market that allows traders ...
Related Articles
  1. Bonds & Fixed Income

    The Importance Of Diversification

    Without this risk-reduction technique, your chance of loss will be unnecessarily high.
  2. Options & Futures

    A Beginner's Guide To Hedging

    Learn how investors use strategies to reduce the impact of negative events on investments.
  3. Options & Futures

    For Maximum Market Returns, Get Creative With Hedges

    Proper hedges help to contain your losses while still allowing profits to grow.
  4. Active Trading Fundamentals

    What is the difference between hedging and speculation?

    Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying asset. Hedging attempts to eliminate the volatility associated with the ...
  5. Investing Basics

    The Most Popular Bitcoin Mining Software

    Success at mining bitcoins depends on the combination of time, knowledge, computer hardware and the complementary software.
  6. Mutual Funds & ETFs

    What is the difference between a hedge fund and a private equity fund?

    Learn the primary differences between hedge funds and private equity funds, both of which are utilized by high net worth investors.
  7. Mutual Funds & ETFs

    How do hedge funds determine what assets to own?

    Learn about the various types of investments that hedge fund managers use, and explore basic hedge fund management trading strategies.
  8. With stocks surging, financial advisers and their wealthy clients are asking why they should continue to bother with poorly performing alternatives.
    Professionals

    Are Advisors Off Alternatives?

    With stocks surging, financial advisers and their wealthy clients are asking why they should continue to bother with poorly performing alternatives.
  9. Mutual Funds & ETFs

    Where does a hedge fund get its money?

    Learn how a hedge fund is structured and how the managing partner of the fund goes about the process of finding and soliciting investors.
  10. Mutual Funds & ETFs

    What is the purpose of a hedge fund?

    Find out what a hedge fund is, how it is set up and why it is different than other forms of investment partnerships like mutual funds.

You May Also Like

Hot Definitions
  1. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  2. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  4. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  5. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  6. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
Trading Center