[hej] 
noun, verb, hedged, hedg⋅ing.| 1. | a row of bushes or small trees planted close together, esp. when forming a fence or boundary; hedgerow: small fields separated by hedges. |
| 2. | any barrier or boundary: a hedge of stones. |
| 3. | an act or means of preventing complete loss of a bet, an argument, an investment, or the like, with a partially counterbalancing or qualifying one. |
| 4. | to enclose with or separate by a hedge: to hedge a garden. |
| 5. | to surround and confine as if with a hedge; restrict (often fol. by in, about, etc.): He felt hedged in by the rules of language. |
| 6. | to protect with qualifications that allow for unstated contingencies or for withdrawal from commitment: He hedged his program against attack and then presented it to the board. |
| 7. | to mitigate a possible loss by counterbalancing (one's bets, investments, etc.). |
| 8. | to prevent or hinder free movement; obstruct: to be hedged by poverty. |
| 9. | to avoid a rigid commitment by qualifying or modifying a position so as to permit withdrawal: He felt that he was speaking too boldly and began to hedge before they could contradict him. |
| 10. | to prevent complete loss of a bet by betting an additional amount or amounts against the original bet. |
| 11. | Finance. to enter transactions that will protect against loss through a compensatory price movement. |
| hedge (hěj) n.
v. tr.
[Middle English, from Old English hecg.] hedg'er n., hedg'y adj. |
Hedge
Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
Investopedia Commentary
An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations.
Investors use this strategy when they are unsure of what the market will do. A perfect hedge reduces your risk to nothing (except for the cost of the hedge).
Related Links
A Beginner's Guide To Hedging
Introduction To Hedge Funds - Part One
Introduction To Hedge Funds - Part Two
Finding Profit in Pairs
See also: Delta Hedge, Hedge Ratio, Hedged Tender, Naked Position, Pairs Trade, Short Selling
hedge
Case Study A hedge that limits potential losses is also likely to limit potential gains. In May 1997 Georgia entrepreneur and billionaire Ted Turner entered into an arrangement whereby Mr. Turner had the right to sell four million of his Time Warner shares to a brokerage firm at a price of $19.815 per share. At the same time the brokerage firm acquired the right to buy the same four million shares at a price of $30.45. This particular hedge, called a collar, established a minimum and maximum value for four million shares of Time Warner owned by Mr. Turner. In other words, the former owner of the Atlanta Braves, Atlanta Hawks, CNN, and superstation WTBS acquired the right to obtain at least $19.815 per share by agreeing to give up any increase in value above $30.45. Time Warner stock subsequently skyrocketed when America Online acquired the firm at a price nearly triple the $30.45 stipulated in the agreement. Thus, the hedge ended up costing Mr. Turner approximately a quarter of a billion dollars. On a positive note, the four million shares represented less than 4% of Mr. Turner's total holdings of Time Warner stock he had acquired when the firm bought his Turner Broadcasting several years earlier. |