Hedging isn’t a guarantee against a loss—it’s a way to reduce risk.
Think of hedging like this: when you buy a house, you know that there’s a possibility that the house will flood, or you may be burgled. Insurance is a way to protect yourself from these possible damages. You would be protecting—or, in other words, hedging—from the risk of flooding or burglary. 🌳
A currency hedge is like insurance—instead of protecting your house from possible floods, you’re placing a protection on your investments from currency exchange rates. A fund can be hedged to be protected from unexpected currency fluctuations.
Like insurance, hedging isn’t free. Fees on hedged funds might be slightly higher than others. If the potential risks don’t happen, you don’t get compensation for your insurance (or, your hedging). But, the assurance and the protection of hedging can still be valuable.
Some funds are fully hedged, and others are partially hedged.
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