Hedges are a good investment because once it has matured a hedge provides food and shelter for many species of birds, animals and insects. There are government subsidies available for establishing and maintaining them. They also provide returns for people in the form of wood and in some cases edible fruit.
this post was submitted on 13 Nov 2024
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https://www.investopedia.com/trading/hedging-beginners-guide/
More like bet 80% on a likely thing and 20% on a disaster.
Thats more like the gambling we all know and love
Can we learn to estimate these odds on sight like that?
Options trading is very much more like gambling than traditional buying/selling stocks.
Unless you have in depth knowledge of the company operations or at least the very specific industry a company is in and all of their major investors, most stock investing is gambling these days. And with options, shorting, etc., even moreso. It's more about knowing when a stock will make large changes and taking advantage of those changes than actually investing in a company that you believe in. And the value of companies has little to do with actual viability of the company or it's assets, only the short term estimation by major investors of their profit. A single wealthy investor or investment firm can easily manipulate the price simply by buy or selling in large enough amounts and automated investment platforms cause a lot of fluctuations. It only works because retirement funds now are used to keep the market stable because no one wealthy and powerful has them, so they're good for sacrifice.
It's not so much about estimating odds as it is limiting the potential downside. Hedging is the rational part of things lol
Can you give me a really classic and rational/prototypical example or hedging? Like is it be stretegically cynical/ Thinking in Bets?
The classic non-stock example is the apple farmer. Apple trees take a long time to grow, years before they produce any significant amount of apples.
Suppose I plant an orchard of the new Awesome Amy Apple trees. I'm betting those will really take off in two years, so they'll be really profitable. But since these apples are my entire income, and I'd rather not eat an entirely apple-based diet by then, I'm going to hedge my investment. I'm giving up some profit to reduce my risks.
I'm making a contract to sell half my apples for, say, 20 dollars per bucket. Now, they might be worth 40, but they might also be completely worthless if the Perfect Pete Apple becomes more popular. So I'm giving up some potential profit in exchange for certainty by hedging.
Another type of hedge would be me planting 75% Awesome Amy, and 25% Perfect Pete. I'm still assuming the alliteration will win the day, but by spreading my investment around, I'm reducing my risk.
To translate this to the stock market, the first examples would be to buy options for the future. The second example is simply spreading your investments.
Me reading this like "Noooo, if you plant Awesome Amy Apples you won't get Awesome Amy Apples, you have to graft Awesome Amy Apples branches onto existing apple trees to get Awesome Amy Apples!"
Does it at least take a long time, thereby not entirely ruining my analogy?
It doesn't ruin the analogy at all because you'd still need to plant apple trees to make an orchard! It's just that apples aren't true to seed so apple trees you plant give nasty apples. It's more of a fun fact about apples lol.
There are many ways to hedge, and for many different reasons. Lets say I want to invest in Home Depot because I think a lot of people are going to start building new houses and renovating their old ones. That means that lumber, construction companies, and other house things like appliances and nifty faucets should have a greater demand.
But what if I am wrong?
I don't want to bet the farm, yolo and lose my investment. I haven't done any analysis of Home Depot vs Lowes, but lets say from your analysis you have determined that Home Depot performs better in the market and overall is a much better and more profitable company than Lowes. You can buy 100 shares of Home Depot and simultaneously sell 100 shares of Lowes. If you are right and the real estate market goes up, you make money, but less than you would if you did not hedge. If you are totally wrong and the whole real estate market tanks, you lose money on your Home depot trade but because both stocks are tanking, you are making more money on your Lowes trade than you are losing on your Home Depot trade. So you are dead wrong on your gamble but you still make money.
Another way to hedge this trade would be to buy 100 shares of Home Depot and then buy an option to sell 100 shares of Home depot at the same price. This is like buying insurance, but prevents you losing more than the cost of buying the option. If you are right and home depot goes higher, the cost of the option cuts into your profits, but you are in a still profitable trade with less downside risk. If you are wrong you lose only the cost of the option.
There are a lot more techniques than this, all of them have risks and you can be wrong on all of them. Hedging can also take advantage of protecting against things that people dont think about very often, like your currency getting stronger or weaker against another currency, or interest rates or oil supply changing, or the sudden flooding of the market with Ten Forward Star Trek memes.
You bet on a company in a specific market and hope it goes up. Then you diversify another investment into this specific market, but in multiple companies. But you short them a little. First case, company go up, wins go up. Second case, major desaster tanks the whole market you equalize the dumping single company investment with the short in the market. Lost nearly nothing.
Hedging is about recognizing investment risk and mitigating it. That being said, hedging is not really a working strategy, it just has lots of media coverage. Hedge funds leverage a good story to convince investors to give them money to manage. They earn from managing that money without carrying three y risks. The broker always earns.
If you want you invest money with limited risk, broad market index funds area the way to go.
From my perspective you can't bet both sides and still expect gains on average. Sure you can be lucky that the one bet wins more than the other loses but typically that doesn't work if you bet on two opposite outcomes. There are no magical and safe ways to multiply money other than maybe being super rich and already too big to fail.
Hedging isn't about ensuring gains, it's about reducing losses.
So how does hedging prevail at the instititional level it does or it seems like it does as a viable tool in the investing toolkit? Does it consequently hard require insider info and basically its just investing uncertainty theatre?
Hedging is done in many different ways. One of the easiest, that requires zero insight is a future hedge.
Say I hold 1000 shares worth 5 bucks each in company Bob. If the price goes up, that's great, but I'll need to replace my car in three years, and I'll need at least 3000 bucks for that.
So, I'm going to spend some money now on buying an option in 2 years 11 months to sell 1000 shares for 3 bucks per share. That way, if Bob company completely collapses, I'll always have at minimum 3000 bucks.
Of course, those options cost money to buy, so I'll have to pay to reduce my risk, but I don't need any real insight into the market to use this kind of hedge.
In the example you give in the OP, it's relying on the guess that it would be unlikely that Kamala wins and Tesla goes up OR that Kamala loses and Tesla goes down. Those were still possible outcomes though.
From my perspective you can’t bet both sides and still expect gains on average.
Statistically you can. Firstly, when you invest you can limit how much that could be lost right off the bat by how you invest and via what amount. For example: BUYing $20k in 2 opposing stocks, split 10k each. Max possible loss? All $20k.
Let's say the Index goes up 10% which suggests on average that $20k is now $22k, or $11k/stock.
In actuality stock A loses 50% but stock B gains 60%. Had you luckily invest solely in the right stock (B) with all 20k you would have made $12k. Badly (stock A)? Lost $10k. By hedging you dilute max potential gains to mitigate catastrophic loses.
I've never tried it, but I think it's when you invest and your funds are doing well, but you never actually cash out.