what is a hedge 
a hedge is an investment that is selected to reduce the potential for loss in other investments because its price tends to move in the opposite direction this strategy works as a kind of insurance policy offsetting any steep losses in other investments the term hedging can be used to describe diversifying a portfolio by buying shares in a conservative bond fund to offset potential losses in more volatile stock funds in the financial world where traders constantly buy and sell assets some of them highly risky hedging typically involves trading in derivatives which can be effective hedges because their relationship with their underlying assets is clearly defined investopedia madelyn goodnight