ELI5: hedge

What is a hedge?

A hedge is like a safety net that protects you from losing money [5]. Just like you might wear a seatbelt in a car to protect yourself if there's an accident, investors use hedges to protect their money if investments go bad [5].

Why do people use hedges?

When you invest money, sometimes things don't go the way you hope and you could lose your money [5]. A hedge is a way to bet on the opposite side so that if one investment loses money, another one makes money to balance it out [5].

How does hedging work?

Imagine you have a toy collection you think will go up in value, but you're scared it might actually lose value instead [5]. You could buy insurance on it, or trade it for something else that would make money if toy prices fall—that's a hedge [5].

What are hedge funds?

Hedge funds are groups of rich investors who pool their money together and hire smart money managers to use fancy tricks (called hedging) to try to make even more money [7].