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In financial terms, the dictionary definition of "to
hedge" is: To initiate transactions
that are protected to reasonable magnitudes
against loss by using instruments that will make
inverse price movements.
Hedging is a means of
preventing complete -- or at least large -- losses
of a position through the use of a
counterbalancing position.
If today's hedge funds have
been using reasonable mechanisms and tools to hedge, why are so many
hedge funds failing?
And why are so many hedge
funds failing to such a large extent as to force them into liquidation?
Logical answers include, 1.)
They did not understand how to effectively hedge many positions, 2.)
They failed to put hedges on many positions in order to cut costs, or
3.) They used the regulatory title of "hedge fund" so that they could
take on extraordinary margin debt, thus executing highly leveraged
positions.
In any case, many hedge
funds held on too long out of arrogance and failure to envision the
potential magnitude of today's credit clutch.
Pamela K., NY |