The “hedge” in “hedge funds” is an historical artifact. Not all hedge funds hedge, and not all funds that hedge are hedge funds.

Hedge funds are defined by what they are not. They are commingled investment vehicles (meaning they combine funds from two or more investors) that are not registered for public sale.

Not registering for public sales means the funds cannot advertise or accept retail investors—only institutions and “qualified” investors, which basically means rich. In return, the hedge funds have the freedom to:

• Charge performance fees
• Use unrestricted leverage
• Take concentrated positions
• Keep positions secret
• Use derivatives without restrictions
• Short stocks without restriction
• Lock up investors for extended periods

Actually today the distinction between hedge funds and registered funds is blurring—more restrictions on hedge funds, loosening restrictions on public mutual funds. So the list above is not as black-and-white as it used to be. There are “liquid alts,” traditional hedge fund strategies offered to retail investors, and private partnerships following traditional investment strategies. Nevertheless, it’s still a useful way to think about the difference between hedge funds and public commingled funds.

Leverage, derivatives and shorting mean hedge funds can hedge more easily and extensively than public funds. Many “absolute return” funds, for example, hedge away risks to major market factors. This makes their returns uncorrelated with the portfolio returns of their investors, which means they add little or no risk to those portfolios, even if the hedge funds themselves are highly volatile. Another popular strategy is “long-short” equity that shorts some stocks in an attempt to get the average returns of an equity fund, with the volatility of a bond fund. The short stocks hedge the long stocks.

There are many other hedges a hedge fund might use. But they don’t have to use any to be hedge funds.

Two things.

You don't measure it by static metrics.

You measure it by logic. And that means you will make mistakes along the way.

But don't let that worry you.

General financial academic theory might tell you; what's the Sharpe Ratio of my portfolio?

I remember this at university; it hurt. Because this shit is so outdated and never worked; this shit in the 00s was already useless.

One specifically thinks of; “what does one actually want?”.

And people clearly don't understand this metric; as the language that I see next to the numbers don't align.

Because the name of all these metrics (Sharpe, VaR, Sortino, my ass, etc), it’s all suffering from linguistic framing effect.

It's either named after the author and then has a definition (on paper), but the maths itself; doesn't allow to extract what the words say that that metrics entails;

“Good” vs “very good” Vs “excellent”.

Holy mackerel!!!

If someone tells you he has done good today, very good or excellent.

Do the words itself matter? “Or who say the words?”. Because this coming from an idiot trader; you can link the psychology and the mathematics and thus deduction of what is said; and more reliable insight as to what it means.

Because blank, hardcoded, fixed, the difference between those 3 can't tell you anything. It can't!

So all this shit is nonsense;

It's fucking ridiculous. It's all nonsense.

The standard deviation is limited in ability to capture what is considered “exposure/risk” in a portfolio.

It doesn't adjust for skewness or kurtosis for example.

Now imagine two portfolios, one only has US and UK government bonds, and the other has US, UK, Ukraine and Russian government bonds.

The yields on the latter two are far higher, but also more risky. But the risk has nothing to do with idiosyncratic or not.

Investment grade bonds

Vs

Junk bonds

The latter depends on more than just deviation of its time series, one has to adjust for; likelihood of Ukraine going default Vs Russia.

That isn't difficult. That likelihood can be calculated through Bayesian inference. The yield return on either Russian bonds or Ukrainian doesn't differentiate enough to offset the likelihood of going defunct.

You could argue how likely is US going to sponsor Ukraine versus China sponsoring Russia?

But the Sharpe Ratio won't tell you jack shit. Because junk bonds vs government bonds can have very similar standard deviation; but will differ massively in Kurtosis for example.

Again; think;

The first thing I would do is take the best 5 and worst 10 trades a trader made over a month. Does the average return suddenly differ if you take his best and worst trades away?

That tells you far more than a metric.

Does the “I've lost on these trades”, tell you that even in the worst 10 there is massive difference already; indicating no good sense of risk appetite. Likely gamblers fallacy. High wins, high lows.

You go by sense of; what do you mean performance of a portfolio?

And then seek from the basics; root psychology and simply start with the simplest maths and go up from there. This way you build you're own metrics.

Like how we used to use Value At Risk when I was still a permanent employee in a bank; value at risk doesn't imply the value at risk.

We used it as idiot measurement indicator to check if traders could keep their VaR vector constant. The actual number we didn't give a shit about. We only cared if a trader was able to keep this metric as near a constant and as low as possible. Because maths of Historical or Parametric VaR simply tells you;

It can be done.

Let me share a bit of my experience. for a couple of decades I did the books for several hedge funds, a few of them fund-of-funds. Such funds are marketed to an idealized client who might be responsive to its aims. So, as the fund manager you will go out and evaluate funds to include that prospective clients might respond to. Now go back to 1980s when Sharpe ratio and other mean variance measurement techniques were at their apex and you find funds that are responding in response to the manager searching for a method of evaluation. Along comes Bernie a sharp-enough dude to give the ultimate (fund-of-funds client) investor what it is they think they want: low volatility, minimal draw-downs and OK performance. Now you have a mess on your hands. Beauty is in the eyes of the beholder. If you want to invest look for the things you want as there is no underlying theory to back you up.

Hedging in commodity trading can be profitable by reducing or mitigating the risks associated with price fluctuations in the commodities market. The primary goal of hedging is not necessarily to make a profit directly but rather to protect existing positions from adverse price movements. Here's how hedging can be profitable:

1. Risk Reduction: The main purpose of hedging is to reduce the potential losses resulting from adverse price movements. For example, a producer or consumer of a commodity may use hedging to lock in a price for their future purchases or sales, thus protecting themselves from unfavorable price changes.
2. Price Stability: By using hedging strategies, individuals and businesses can stabilize their costs or revenues, which is especially important when dealing with commodities that exhibit price volatility. This stability can lead to better financial planning and management.
3. Profit Preservation: Hedging can help preserve profits. For instance, a farmer who hedges the price of their crop can ensure a certain level of income regardless of market price fluctuations. This allows them to protect their profit margins.
4. Improved Planning: Hedging allows businesses to make more informed decisions and plan for the future with greater certainty. For example, a company that relies on a particular commodity as a key input can use hedging to secure the availability of that input at a known cost, facilitating long-term business planning.
5. Reduced Margin Calls: In some cases, hedging can help reduce margin calls and financial stress. When trading futures or options contracts, margin calls can occur if market moves go against the trader. Hedging can limit the exposure to such calls.
6. Profit from Arbitrage: In some instances, hedging can create arbitrage opportunities. This means that a trader can profit from price discrepancies between the spot market and the futures market. For example, if the futures price is higher than the expected spot price, a trader can hedge a long position and profit when the prices converge.
7. Speculative Profits: While hedging is primarily a risk management strategy, there are cases where speculators use hedging strategies to profit from anticipated price movements. Speculative hedging can be complex and involves taking offsetting positions to capitalize on price changes.

It's important to note that successful hedging requires a good understanding of the commodities market, as well as careful planning and execution of hedging strategies. Additionally, hedging is not without costs, as it may involve transaction fees, spreads, and the cost of holding positions. Moreover, there is no guarantee that a hedging strategy will always be profitable, as markets can behave unexpectedly.

Join my Quora group where every day I publish my top trading signals (that I personally use), based on technical and sentiment models! A weekly track record is kept to evaluate the progress. Subscribers also get a free copy of my book (the subscription ranges from free to $0.83/month).

Are you asking about the cost of people, infrastructure, licenses, fees and other things necessary to trade? Or the cost of executing a trade including commissions, fees, bid/ask spread and market impact?

In other words, are you asking about the total cost of setting up the ability to trade, or the marginal cost of executing a particular trade?

The former is measured like any other operational process. The explicit costs for the latter are easy to measure, but the bid/ask spread and market impact must be estimated. This can be a extensive research effort, but one basic statistic is the average difference between the mid-price at the time the trade decision is made and the actual all-in execution price.

I will explain this using different scenarios because hedging can be very different from the importer’s and exporter’s perspective. To understand this in context, I have used some examples.

Hedging for Importers: Let’s assume they have to purchase raw material at a future date from now because of a business opportunity and the selling price is already fixed on your part. You stand a risk of losing your profits/making losses if the price of the raw material increases. Hence to effectively deal with this risk, the importer will have to buy a futures contract and square it off on the day of purchase to hedge your price risk.

Hedging for Exporters: Let’s assume they have to sell their raw material at a future date from now because of a business opportunity and there is a risk that the price of the raw material may come down in the future. Hence, to effectively deal with this risk, the exporter will have to go short on a futures contract. This way he will make money on the futures contract if the price goes down and offset the losses in the cash market.

Hedging is a pretty simple concept. It works the same way with almost all things including shares, currencies, commodities etc. Hope this answer was resourceful.

The term hedge fund has become popular in the great 80’s.

Believe it or not, computers were already widespread, even though, Michael Douglas still uses a phone in his movie Wall Street.

(Side note: the 1987 crash was partially due to an immature automation)

Many traders had various strategies and styles of trading, but the most common way of investing was to pool cash from various investors and get long in select instruments.

The fund manager could reshuffle, but not very often and once in, was often just staying put, riding passively the ups and downs of the markets.

Again, there were many active traders, but most funds were acting like vegetarian, lazy diplodocuses.

At some point, the word started spreading some investment funds were able to implement unusual strategies on a large scale, for example, not only could they be long with a portfolio of instruments, but they could be short as well.

Not many, but few even knew how to use rudimentary derivative products to improve risks in their assets.

This was obvious those funds had an “edge”, they could build walls around their portfolios to protect them when the winds were howling on the markets and many were drowning during the storms.

Hedge funds is a generic term covering all funds able to be more sophisticated than a mere asset pooling with the only goal of being long in one or a couple asset classes.

Nowadays, there are myriads of complex tools both technical, mathematical and financial to build any kind of risk profile a client might dare to imagine.

Just as Bill Gates was pointing out in his book “At the speed of thought”, we are mostly limited by our ability to think and envision, virtually freed by the powerful technologies we have built since ww2.

So, to make it simple, nowadays, a hedge fund is any fund able to manage “risks” with sophisticated tools, methods, knowledge and skills.

One of the first sophisticated hedge fund:

Be it a beginner or expert trader, in order to make the most of day trading, having knowledge of good investment strategies is crucial. The functioning of a trading strategy is greatly influenced by the simultaneous occurrences, which alter with time. Knowing the market is vital for maximizing results and there are certain trading indicators that can help you with this.

Let’s have a look at these indicators:

1. Daily Moving Average-On a stock chart, a daily moving average (DMA) is a line connecting the median closing rates for a given time period. The moving average becomes more dependable as time elongates. Since prices do not increase in a straight line, this indicator will help you understand the fundamental volatility of the market.
2. Bollinger Bands -This band is divided into three sections: the moving average, the lower limit, and the upper limit. All of these are indicative of the stock's error margin, which is essentially how much the price differs significantly from its median. This informs traders about the stock's trading range.
3. Momentum Oscillators- The momentum oscillator aids in identifying when changes in market sentiment are underway
4. Relative Strength Index (RSI)- The RSI is a handy intraday trading tool for comparing share price profits and losses. Data is transformed into an aggregate using this indicator, which assists in pinning down the RSI score, which spans from 0 to 100. This indicator rises as prices increase and vice versa.
5. The above-mentioned details are important to prepare yourself for day trading.

I assume you mean by potential investors.

Traditional investment managers are evaluated primarily by performance versus a benchmark. A traditional manager who buys large cap US stocks is evaluated primarily by performance versus the S&P500.

Hedge funds are defined by what they are not—they are not traditional investments that can be sold to the public. But there are many reasons a hedge fund might differ from traditional investments, and many types of hedge funds, so each one must be evaluated differently.

For example, an absolute return fund should be uncorrelated to major financial markets like stocks and bonds. It is evaluated by that correlation, and by its return relative to low-risk instruments like treasury bills.

On the other hand, a long-short equity fund might buy on average $140 of stock for every $100 invested, and short $80 of stock and have a target Beta of 0.6 (so if the market goes up or down 1%, you expect the fund to go 0.6% in the same direction). This manager might be evaluated relative to a portfolio 60% in stocks and 40% in low-risk assets.

A tail-risk fund is supposed to produce very strong returns in sharp market downturns, and not lose too much in between. This fund is evaluated by adding a small amount of it to an institution’s portfolio to see how much it changes the Sharpe ratio.

Many hedge funds, such as global macro, arbitrage and managed futures funds, are primarily evaluated by alpha and maximum drawdown.

Hello quora people,

When we talk about stock market, we must consider risk factor. No one can predict the stock market. There is always possibility of loss. But we can protect our trades or position by hedging them. Let’s understand what is called hedging? and when we should do it?

What is hedging?

Hedging is like buying insurance for your trades. It’s a strategy traders use to protect their investments from unexpected market moves. Just like you would buy insurance to safeguard your car or home, hedging helps minimize potential losses in your trading positions.

For example, if you own stocks and fear the market might drop, you can hedge by buying put options. These give you the right to sell your stocks at a certain price, even if the market crashes. Similarly, if you are short-selling a stock and worry about a sudden price jump, you can hedge by buying call options. This way, you balance the risk while staying in the game.

When Should You Hedge?

1. Uncertainty Ahead:- If there’s a big event like a budget announcement, central bank decision, or geopolitical tension, the markets can swing wildly. Hedging ensures you’re protected no matter which way it moves.
2. Large Positions:- If you’re holding big investments, even small losses can hurt. Hedging helps cushion the impact.
3. Volatile Markets:- When markets are unpredictable, hedging can keep your portfolio stable.
4. Preserving Gains:- If you’ve made good profits but aren’t ready to close your position, hedging locks in your gains while keeping your options open.

Key Takeaway for Traders

Hedging isn’t about making profits; it’s about managing risks. Not every trade needs to be hedged, especially if you’re confident in your analysis or holding long-term. But when the risk feels too high, a good hedge can save you from sleepless nights.

If you are new to hedging, start small and learn the tools like options, futures, or inverse ETFs. The goal is to protect your portfolio without overcomplicating your strategy. Everyone can not understand hedge trading. For this type of trade, you need to consider a SEBI REGISTERED RESEARCH ANALYST. As I mentioned earlier that I enrolled to a top-notch SEBI REGISTERED EQWIRES RESEARCH ANALYST, I earned much profits. I received a hedge trade from my advisory, I booked nice profit in BTST hedge trade. Let see how:

In this trade, I bought 1 lot of GODREJPROP FUT at 2787.60 and sold it at 2870.25. Against that I bought 1 lot of GODREJPROP 2800 PE at 109 and sold it at 69.35. It’s lot size is 225. I booked profit of RS. 18,596.25/- in futures and loss of RS. 8921.25/- in PE. So my net profit is RS. 9,675/-. Thus, by hedging the position, you can secure your trade in volatile market. I am very happy and thankful to EQWIRES for guiding me such a way. They are excellent in market research and supportive to their clients. Happy to be a part of team EQWIRES. I suggest to connect with them for better trading and investment advice.

Thanks you for reading my answer. If you find this answer useful, please don’t forget to share and upvote.

1. Are you happy in life?
2. do you have excess stress?
3. you married?
4. how much did you sleep?
5. etc.

Imagine a stock, Xendraphora, its a new established stock which had an IPO in 2018. It is a retail store, opened in London and New York last year. You probably heard of it.

P/E is 3

RSI is 95

Profit Margin is 0.1%

Revenue growth is 25%

EPS growth is 2%

Net income was negative last year

Net income was positive this year

current ratio is 1, far below industry standard

Backed by institutional investors

Xendraphora is a buy because P/E 3, revenue growth is 25%, net income was positive this year, backed by institutional investors.

Xendraphora is a sell because RSI is 95, profit margin is 0.1%, net income negative last year, current ratio is 1 (but lowest of peers) and backed by institutional investors who might drop it, causing it to fall more..

I taught similar classes as part of internship sessions, for grads, at work. Even at investment societies in LSE a few years back.

They all created an image they wanted to see based on the numbers as it was their understanding that the goal was to make a “solid buy or sell” case. It wasnt. Yet, they fell for it.

Assumptions you have, they are dangerous.

The above firm doesn't exist.

The logo is fake.

The metrics are fake.

Yet I had an entire classroom, convinced it was a buy or a sell.

Perception, understanding, it is vital. Our heads, when we see a stock, a logo, a metric, we already paint a picture.

Don't do that.

Be like a spectator. Observe.

The term “hedge fund” refers to a partnership of investors that makes high risk investments such as shorting stocks and investing borrowed money.

It’s probably most helpful to compare them to something like a mutual fund. A mutual fund pools money from investors, but it only uses that money to buy securities. So a mutual fund can’t really do the kinds of things a hedge fund can do.

For example, say you think Coca Cola is a really well-managed company, much better than PepsiCo. A mutual fund can buy Coca Cola stock. But what if the whole soft drink industry collapses? A hedge fund can buy Coca Cola stock but also hedge the risk of the soft drink industry collapsing by shorting PepsiCo. If the soft drink industry collapses, they’ll lose money on their Coca Cola stock but gain money on their PepsiCo short, cancelling it out.

Hedge funds are called “hedge funds” precisely because they can use these techniques beyond just buying securities to hedge various types of risk and implement more complex strategies than just buying things you think will increase in value.

In english it means to do something to protect other thing. Now take this to financial field. You bought a share A and worried that price may fall. To protect loss you found a stock B, which has an inverse correlation with stock A. Means when stock A goes down stock B rises in same proportionate. So if A makes loss in future due to price fall you gain because B will rise.

So by purchasing B you hedged Price fall of A. This is hedging.

In practical world it is technical as you need to find hedges, find the correlation (which is often imperfect) and you need to take care of cost. Also hedging as a product is also complex. Because buying hedge also has cost.

Hope I have given you a basic to climb the details. All the best

Measuring trading performance is crucial to understand how well your trading strategies are working and to make necessary adjustments. Here are key metrics and methods to measure trading performance effectively:

1. Return on Investment (ROI)

ROI measures the gain or loss generated relative to the amount invested. [math]ROI=Net ProfitInitial Investment×100\text{ROI} = \frac{\text{Net Profit}}{\text{Initial Investment}} \times 100[/math]

2. Annualized Return

Annualized return standardizes returns to show what an investor would earn over a year. [math]Annualized Return=(Ending ValueBeginning Value)1n−1\text{Annualized Return} = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{n}} - 1[/math] where [math]nn[/math] is the number of years.

3. Win Rate

The percentage of trades that result in a profit. [math]Win Rate=(Number of Winning TradesTotal Number of Trades)×100\text{Win Rate} = \left( \frac{\text{Number of Winning Trades}}{\text{Total Number of Trades}} \right) \times 100[/math]

4. Average Gain and Loss

Calculates the average profit from winning trades and average loss from losing trades. [math]Average Gain=Total Gains from Winning TradesNumber of Winning Trades\text{Average Gain} = \frac{\text{Total Gains from Winning Trades}}{\text{Number of Winning Trades}}[/math] [math]Average Loss=Total Losses from Losing TradesNumber of Losing Trades\text{Average Loss} = \frac{\text{Total Losses from Losing Trades}}{\text{Number of Losing Trades}}[/math]

5. Risk-Reward Ratio

Measures the potential reward of a trade relative to its risk. [math]Risk-Reward Ratio=Average GainAverage Loss\text{Risk-Reward Ratio} = \frac{\text{Average Gain}}{\text{Average Loss}}[/math]

6. Sharpe Ratio

Evaluates the risk-adjusted return of an investment. [math]Sharpe Ratio=Average Return−Risk-Free RateStandard Deviation of Return\text{Sharpe Ratio} = \frac{\text{Average Return} - \text{Risk-Free Rate}}{\text{Standard Deviation of Return}}[/math]

7. Maximum Drawdown

Measures the maximum observed loss from a peak to a trough before a new peak is achieved. [math]Maximum Drawdown=Peak Value−Trough ValuePeak Value×100\text{Maximum Drawdown} = \frac{\text{Peak Value} - \text{Trough Value}}{\text{Peak Value}} \times 100[/math]

8. Profit Factor

The ratio of total profits to total losses. [math]Profit Factor=Total ProfitTotal Loss\text{Profit Factor} = \frac{\text{Total Profit}}{\text{Total Loss}}[/math]

9. Trading Journal

Maintaining a trading journal can help you track each trade's specifics, such as entry and exit points, rationale, and outcomes. This qualitative analysis complements quantitative metrics.

10. Benchmark Comparison

Compare your performance against a relevant benchmark index like Nifty 50 or Sensex to gauge relative performance.

How Does Commodities Trading Work?

1. Spot Market: In the spot market, commodities are traded for immediate delivery at the current market price.
2. Futures Market: In this market, traders buy or sell commodity contracts to be delivered at a future date. Futures allow price speculation and risk management (hedging).

For instance:

• A crude oil trader can speculate on price movements or hedge against fluctuations if they are an airline needing to lock in fuel prices.

Commonly Traded Commodities

1. Energy: Crude oil, natural gas, coal.
2. Metals: Gold, silver, platinum, copper.
3. Agricultural Products: Corn, sugar, coffee, soybean.
4. Livestock: Live cattle, lean hogs.

Why People Trade Commodities

1. Diversification: Commodities tend to have low correlation with stocks and bonds, making them a good diversification tool in investment portfolios.
2. Inflation Hedge: During periods of inflation, commodity prices often rise, offering protection against declining currency value.
3. Speculation: Traders can profit from short-term price movements driven by supply-demand dynamics, geopolitical events, or macroeconomic trends.

How to Get Started in Commodities Trading

1. Choose a Commodity Exchange: Popular ones include MCX (India), NYMEX, and COMEX.
2. Select a Broker: Ensure the broker offers commodities as part of their offerings.
3. Learn About Leverage: Commodity futures often involve leverage, which amplifies both profits and losses.
4. Study Fundamentals: Research factors influencing prices, like weather (agriculture), geopolitics (oil), and interest rates (gold).

Hedging is a technique to manage price risk. It is not exactly like speculative betting. It is not free either. It involves some expenses for the hedging entity. You’ll need to keep the margin and there are various fees involving the traders and the exchanges. It also comes with many regulatory obligations and record keeping for the producer entity.

So the answer to your question is ‘yes’ if the company is large enough to manage all hedging obligations. Most of the Indonesian coal mining companies do not use hedging at all. They sale at a pricing formula involving certain index pricing. Most of the australian coal mining companies do hedge their prices.

Hope I was helpful.

Like any other professional business. They set targets or objectives and use those as benchmarks in their actual performance reviews. It is called Management by Objectives.

Targets are usually formulated as rewards and risks. Rewards are usually defined as an expected annual growth rate or an expected compounded annual growth rate. Risks are often defined as the standard deviation of the portfolio returns, of the variance of these returns, or of the maximum drawdown in these accumulating returns. Their actual performance is usually quantified by their actual annual (compounded) return and their quantified risk. The ratio of the two is called a reward/risk ratio. For risks being equal to the maximum drawdown, the reward over risk ratio is called the MAR ratio. For risks being set equal to the standard deviation, the reward over risk ratio is called the Sharpe ratio. Finally, for risks being set equal to the standard deviation of the negative returns, the reward over risk ratio is called the Sortino ratio. For balanced risks and rewards, the MAR ratio should be equal or larger than one. That target is difficult to achieve, though not impossible. A MAR ratio of 1 corresponds to a Sharpe ratio of about 1.5.

Ever heard of the phrase "salvaging pride"?

Imagine your favourite football club playing one of its fiercest rivals. Let's take the example of Liverpool and Manchester United for this matter. You are a diehard LFC fan, and Mo Salah is an absolute favourite of yours.

What if LFC wins the match, but Mo Salah gets red carded or injured within the first 2 minutes of the game? Conversely, what if LFC lose the match, but Salah scores the best hat-trick that you've ever seen?

This is probably a good example of hedging, which means an investment which minimizes risk. You'll be sad if LFC loses, but you'll hedge that against Mo Salah scoring a hat-trick, get it?

Another example of hedging is getting life insurance. You minimize the impact of your death by hedging your life against a life insurance to make sure your family doesn't suffer.

Hedging is mainly to protect you from losses and save your investments. For instance, if you invest in a certain instrument, you may buy the right to sell your stock for the same buy price using a small extra fee. This ensures that you make no losses except that fee which you paid.

Diversification is also a hedging strategy. The fall of one asset is compensated for by the rise of another. This ensures that you don't lose everything if one asset collapses.

Therefore, hedging is one strategy where you minimize risk by investing.

I used to run exposure management for a number of companies as part of corporate treasury.

I did that in foreign exchange, interest rates on borrowings, as well as some fuel hedging for an airline, And I now advise on commodity price risk hedging for grain companies and other institutions.

A risk hedging desk enters into positions that are opposite of what the company naturally has risk exposure to in terms of its cost of production or returns on output. The risk energy desk needs to find good counterparties and a good contract types that fit the business that it has in order to as much as possible neutralise the effective adverse price movements on its real business.

So for example a Grain Producer may need to supply wheat into the future for its customers like General Mills who turns wheat and corn into flour and then bread or Cereal.

If that grain producer can see a likely overproduction of corn and wheat they can sell forward either in the futures markets or to a counterparty credit quality and lock in the prices before the market falls in price. The amount can be partial or full of what they expect the demand would be from say General Mills.

That is where the science and art comes in to make sure that you do not over hedge or do not hedge unnecessarily. So if the price went up, and you had sold forward at lower prices, and now you could have sold at sell at higher prices you are not suffering from a lost opportunity to sell for a bigger profit.

Use these simple techniques for trading commodities to reduce your risk of losing money when you trade.

• Watch How The Market Moves - Every trader has their own way of investing in the market. All of these different trading techniques help traders make more money and lose less. Traders must pay close attention to the market for certain amounts of time to make sure their strategies work. Traders should also avoid making some of the most common mistakes, like only following the crowd, making decisions based on how they feel and using sudden price changes as a reason to leave or enter the market.
• Diversify Your Capital - If traders and investors want to do well as commodity traders, they must be able to articulate their risks and returns. First of all, investors should know ahead of time how much risk they can handle compared to how much money they want to put in. One of the best ways to avoid losing money when trading commodities is to not put all of your money into just one commodity. Experts always tell new traders to diversify their portfolios, and this is also true for trading commodities. But make sure you do your research before doing so.
• Maintaining Stop Loss: In trading, a stop loss is an automatic order that controls the buying and selling of shares when the price of a share reaches a certain amount. So, a stop-loss order can be used to reduce the risk that comes with trading commodities during times when the market moves quickly. In fact, the main reason most traders stop trading is because they lose a lot of money because they didn't put a stop-loss order on their trades in case they hit a certain low.

To diversify a risk, you have to take less of it. If you own $100 of a stock and want to diversify, you have to sell $50 of the stock and use it to buy another stock.

When you hedge, you can keep the entire risk. If you own $100 of a stock you can hedge it by going short an index future.

When you diversify, you typically reduce your expected return as well as your risk. Assuming the first asset you would buy was the one with the highest risk-adjusted return, when you sell some of it to buy other assets, those assets will have lower risk-adjusted returns.

When you hedge, you could increase or decrease your expected return, depending on the expected return on your hedge. For example, if you bought a foreign currency bond and hedged the foreign currency risk, you keep all the expected return from the bond, and could add or subtract expected return depending on whether the expected return on the currency hedge was positive or negative.

Depending on whether you are buying or selling, hedging involves investing in the instrument that will offset your physical price exposure. Let’s say you today enters into an agreement to purchase oil with physical delivery at your terminal in 60 days (two months). The vessel you have chartered will load the oil at the seller’s terminal in 30 days.

Title to the product shifts from the seller to you when it is loaded onto your carrier. And you will pay the price on the day of loading.

In this case, you are exposed to price fluctuations from today to when it is loaded (30 days).

Therefore, when you have agreed with the seller to purchase you immediately call your futures broker to set up a hedge with the corresponding futures contract for the equal amount. Since you purchase oil, your exposure is short (you benefit if the price goes down until you pay for it). Therefore you agree with your broker to purchase oil futures which makes you long (you benefit if the price goes up).

Now you’re short the physical and long the futures and the two positions will offset each other. Your exposure is zero.

On the day the oil is loaded onto your carrier, you unwind the futures position by buying it back. When you sell oil, the opposit is true.

Buy physical? Buy futures!

Sell physical? Sell futures!

Most effective? No such thing. Most effective for who?

Everyone has different levels of experience, different strategies, and different intuition. Not a single trader will think exactly like another and not a single pattern will be exactly identical to another in the past.

I will mention some useful indicators that I believe can provide value but to say how effective they will be in someone's trading plan and how they might utilize them is subjective.

As far as the traditional indicators traders come across in their early days like the RSI and MACD, they can be useful if proven with an edge but I stopped looking at them an eternity ago.

I would suggest looking for indicators of convenience. Let me explain. Find indicators that mark areas of importance for you so you don't have to. A few examples can be things like session opens and closes, session highs and lows, previous day high and low, current day high and low, weekly high and low, opening day price, psychological levels such as ones ending in 50 or 00, etc. Also a few bonuses is using the VWAP and putting it on the weekly setting and using the regular volume indicator to detect rising and slowing momentum. You could also dwell into the volume profile but it's a bit more advanced although extremely powerful.

If you open a chart of your choice and scan a decent amount of days, you will see some reactions at those areas. When I mean reactions, I mean the obvious: a strong rejection, a break and retest, a consolidation followed by a burst, a strong fake out manipulation (liquidity sweep), etc.

How you go about using this information as a building block for a potential play(s) in your playbook is up to you. The sky is the limit.

I really hope whoever reads this decides to actually throw on these indicators and see for themselves (which for the most part you don't even need an indicator for, you can manually draw most of the areas yourself, but there are plenty of indicator scripts that do it for you, saving you the time and trouble, hence why I called them convenience indicators).

I wish someone told me this years ago so I didn't waste time throwing on a bunch of useless lagging indicators looking for magical signals when all I needed was a good understanding of price action and areas of interest.

Just remember that whatever you do, trading is extremely risky and most people lose their capital. Trade carefully and wisely and protect your capital and only use capital that you can afford to lose because in the end of the day, you are responsible for your actions with your account(s).

As far as the work environment, there isn't a systematic variation between equities and commodities hedge funds. Different equity firms will have different conditions as will different commodity firms, and the difference between firms is going to be far, far more different than what they trade.

As far as the actual maths. Commodities tend to be more leveraged. Also every commodity has some "weird thing" about them that effects trading. For example, you cannot store power in any sort of significant way (the closest you can do is to do run a dam backwards.) This means that power commodities are going to be very different than other commodities. For example, you can have negative prices in commodities. Since they can't store electricity, they are desperate to dump power, and so companies will often pay you to buy electricity from them.

In stocks, people tend not to be experts in one stock. In general trading, you generally try to get a practical knowledge of one market. In commodities, people tend to become hyperspecialists at one type of commodity. In my case, I want to understand the bitcoin market backward and forward.

Finally, in commodities you have to take into account the forward curve. You are interested not just in the spot price, but how the forward prices evolve. This is in contrast to stocks were the forward prices are generally trivially calculable from the spot price. The fact that commodities have forward prices that come from the market, means that commodities tend to be calculated with bond prices, and this makes sense if you think of money as a commodity.

Hedging means assuring the investments made are to compensate in case any unforeseen event happens. It ensures that whenever any negative event happens, the impact of the event is reduced.

Commodities act as a good hedge and a large part of the commodity market is made up of hedgers. Here, people who are already involved in a business related to a commodity seek hedge in the market and try to limit their risk.

Let us see how people hedge in commodities:

Let’s say the current spot price of the commodity is Rs. 1000 per unit. If you expect a minimum sale price (MSP) of Rs. 1010 per unit once the crop is ready in the next six months, then you will lower the risk of losses, which might incur due to any unexpected reasons, by hedging in commodities.

If you are a producer of the commodity, then you can sell a futures contract (short sell) of one unit of the commodity with an expiry of six months at the price of Rs. 1010 to ensure you get the expected amount as protection.

If the price of the commodity shoots up to Rs. 1300, then you will lose Rs. 290 (Rs. 1010-Rs. 1300) on your futures contract. At the same time, you sell your produce for Rs. 3000 per unit. Thus, net profit incurred will be Rs. 1010 (Rs. 1300-Rs. 290).

If the price of the commodity remains Rs. 1000, then you will gain Rs. 10 (Rs. 1010-Rs. 1300) on your futures contract. At the same time, you sell your produce for Rs. 1000 per unit. Thus, net profit incurred will be Rs. 1010 (Rs. 1000+Rs. 10).

If the price of the commodity falls down to Rs. 800, then you will gain Rs. 210 (Rs. 1010-Rs. 800) on your futures contract. At the same time, you sell your produce for Rs. 800 per unit. Thus, net profit incurred will be Rs. 1010 (Rs. 210+Rs. 800).

This way you hedge in commodities. In the same way, if you are a consumer of the commodity, then you can buy futures to hedge, in a similar manner.

Hello quora people,

What is hedging?

Hedging is a financial strategy used to reduce or eliminate the risk of adverse price movements in an asset. Think of it as a form of insurance for your investments. For example, if you own a stock and fear its price might drop, you could buy a put option to protect yourself. Hedging helps investors balance potential losses with gains, ensuring stability in volatile markets. While it doesn't guarantee profits, it minimizes the impact of adverse market movements.

How hedge fund operates?

Hedge funds, on the other hand, are investment funds that pool money from high-net-worth individuals or institutions to generate high returns, often using advanced strategies like hedging.

Here’s how hedge funds operate:

1. Diverse Strategies:- Hedge funds employ strategies like long/short equity, arbitrage, global macro, or event-driven trading. For example, they might go long (buy) on undervalued stocks and short (sell) overvalued ones simultaneously.
2. Leverage:- Many hedge funds use borrowed capital (leverage) to amplify returns. While this increases potential rewards, it also raises risks.
3. Risk Management (Hedging):- True to their name, hedge funds often hedge positions to protect against market downturns. For instance, if they’re heavily invested in a particular sector, they might use options, futures, or swaps to reduce exposure to sudden drops in that sector.
4. Flexibility:- Unlike mutual funds, hedge funds have fewer restrictions on what they can invest in. They can trade in stocks, bonds, commodities, currencies, real estate, and derivatives.
5. Exclusivity:- Hedge funds cater to accredited investors who meet specific income or net-worth thresholds. They charge a fee structure called "2 and 20" — 2% of the total assets under management annually and 20% of any profits earned.
6. High Risk, High Reward:- While hedge funds aim for outsized returns, they also carry significant risks due to leverage, complex strategies, and limited regulatory oversight.

Hedge funds are not just about “hedging” in the literal sense but about maximizing returns, often by capitalizing on both rising and falling markets. For those considering hedge fund investments, understanding the associated risks and aligning with a fund's strategy is crucial.

If you’re looking for stability or risk management in your own portfolio, simple hedging techniques, like using options or diversifying investments, can be a great place to start.

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