What is ‘De-hedge’
The process of closing out positions that were originally put in place to act as a hedge in one’s portfolio. De-hedging involves going back into the marketplace and closing out hedged positions, which were previously taken to limit an investor’s risk of price fluctuations in relation to their underlying asset.
Explaining ‘De-hedge’
De-hedging is done when holders of an underlying asset have a bullish outlook on their investment. Therefore, the investor would prefer to remove their hedged position to gain exposure to the expected upward price fluctuations of their investment.
For example, a hedged investor in gold who feels the price of their asset is about to go up would buy back any gold futures contracts they had sold in the futures market. By doing this, the investor will have positioned themselves to reap the rewards of an increase in the price of gold if their bullish prediction on gold is correct.
Further Reading
- Performance and persistence of Brazilian hedge funds during the financial crisis – bibliotecadigital.fgv.br [PDF]
- Risk management and value creation: new evidence for Brazilian non-financial companies – www.tandfonline.com [PDF]
- The risk-return relationship of pension funds with investments in hedge funds – www.tandfonline.com [PDF]
- Hedge accounting choice as exchange loss avoidance under financial crisis: Evidence from Brazil – www.sciencedirect.com [PDF]
