If I’m investing in the Real Estate sector is investing in Home Depot and Lowe’s considered hedging? I’ve been struggling with the definition.
Hedging what?
- Currency risk
- Inflation risk
Some literature say that investing in Real Assets, like Real Estate or commodities, are a Inflation hedge.
I have some difficulty about those kind of “hedges”, like the fake inflation hedge of bitcoin and alt coins.
Buying shares of different companies in the same sector is not hedging.
What you can hedge is known quantifiable figures such as currency movements, or inflation as RLX has said.
Yep, it’s correct. Hedging is a risk strategy, mostly is taking a contrarian position of the risk someone has exposure.
For example, taking an insurance, the customer is passing its risk (health, fire, theft, etc) to the insurance company, the customer sells its risks and insurance company buys its. So one can say insurance is a form of hedging.
Some categories of Financial risks (according to Wikipedia):
- Interest rate risk
- Currency risk
- Equity risk
- Commodity risk
- Valuation risk
- Volatility risk
- Systemic risk
- Model risk
Some of the above risks have financial instruments that can hedge them. Even Weather and Catastrophic risks have financial instruments able to hedge them (e.g. Weather derivatives and Insurance-linked securities (ILS)).
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