Short Hedge


DEFINITION of 'Short Hedge'

An investment strategy that is focused on mitigating a risk that has already been taken. The "short" portion of the term refers to the act of shorting a security, usually a derivatives contract, that hedges against potential losses in an investment that is held long.

If a short hedge is executed well, gains from the long position will be offset by losses in the derivatives position, and vice versa.


A common risk in short hedging is basis risk, or the risk that price levels will not change much over the period the hedge is in place; in this scenario, the asset held in the long position would not gain any value, and the short hedge would lose value.

Short hedging is often seen in the agriculture business, as producers are often willing to pay a small premium to lock in a preferred rate of sale in the future. Also, short hedges involving interest rates are common among institutional money managers that hold large amounts of fixed income securities and are concerned about reinvestment risk in the future.

  1. Hedge

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  2. Futures Market

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  3. Downside Protection

    The use of an option or other hedging instrument in order to ...
  4. Cushion Theory

    The theory used when many investors have taken a short position ...
  5. Hedge Ratio

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  6. Basis Risk

    The risk that offsetting investments in a hedging strategy will ...
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  1. 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 ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  4. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  5. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  6. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>

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