What is Hedge ?
Hedging is a protection strategy against the risks of an investment, which neutralizes the long or short position so that its price does not vary. When making a hedging operation, the investor aims to eliminate the possibility of future losses.
The investor who makes a protection contract for his investments is known as a “hedger”.
The strategy was created by the agricultural commodities market, by the Chicago Board Of Trade (CBOT), where ranchers for the first time pre-set the value of sacks of wheat, soybeans, corn, etc., to avoid losses in the event of a sudden drop in value goods.
How Hedge Works
In the hedge contract, the value of the commodity, stock, security or exchange rate negotiated is fixed, which must be complied with at the time of delivery or completion of the sale. Even if there is a devaluation on the stock exchange, the reference value for the business has already been defined by the hedging operation and must be met.
This type of coverage against the risks of changes in the value of the investment, as well as guaranteeing protection, also prevents potential profits from positive variations of what is being negotiated.
The hedge is more directed at conservative investors, while speculators seek precisely, in small variations, their profits.
It is considered a “perfect hedge”, when the strategy offers gains in the same amount as the losses that the hedger intended to protect occurred.
In Brazil, the practice is regulated by the National Monetary Council. It allows such actions to protect the business, but prevents them from being done only for speculative reasons, for capital gain.
In addition to the financial market, other risk protection practices can also be considered as hedging strategies, as in health insurance contracts, for example.
What are hedge funds
The hedge funds or hedge funds, act as a kind of “association”, where investors who provide capital to the fund and others looking for these funds, to carry out the hedge.
These funds are formed privately, in a derivatives market for selected investors.
You can learn more about how Hedge Funds work.
Foreign exchange hedge
One of the most common scenarios for hedge contracts is about payment obligations in foreign currency.
In order not to exceed the value of a future dollar transaction, for example, the company can make use of a hedge contract and set the currency exchange rate at a certain amount. Thus, there are no exchange rate fluctuations, since the corresponding value has already been pre-established.
To perform this type of protection, it is possible to exchange the indexer that makes an investment pay off, such as the CDI rate, with a financial institution, for the variation of the currency, in an established period.
This hedging strategy is known as the Foreign Exchange Swap, the type of swap in which the exchange rate is considered fixed, for the investor.
It is when the coverage against investment risks is made effortlessly by the company, without the terms of a hedge contract being applied.
This happens when the liability and the asset occur in the same currency. A company that receives export earnings in dollars while buying supplies also in dollars, for example.
Thus, there are no losses on foreign exchange and currency conversion rates, the dollar asset pays the dollar liability and the natural hedge occurs.
What are Hedge Funds
Hedge Funds, known as Hedge Funds, in English, or even Hedge Funds, are funds in which the main strategy is to protect assets from financial losses, while looking for high returns.
These funds are formed privately, in a derivatives market, and are invested by selected investors.
In order to obtain a higher profitability than the market average, more daring strategies are adopted, which require a deep knowledge of its managing partners.
The strategies adopted by this type of fund are differentiated from traditional funds, which characterizes this investment as being of high risk.
How the hedge fund works
The amounts invested in hedge funds are managed by their managers, who seek to invest capital in a diversified manner and, usually, where the return is high.
Despite having as main strategy the protection of financial losses, in this type of fund, managers look for investments in riskier assets, so that the return is the maximum possible.
The main characteristic of hedge funds comes from their versatility, since assets are acquired in a diversified manner and have returns in different ways.
This is due to the fact that these funds are less regulated, in addition to being privately formed for more sophisticated investors.
Hedge Funds in Brazil
Hedge funds in Brazil are also known as Multimarket Funds, although these are not always hedge funds, but it allows them to be more regulated.
A multimarket fund can be a hedge fund in the way that it can be as diverse as possible, managed by highly trained managers and with a well-leveraged profitability.