A hedge fund is a financial strategy aimed at forestalling losses from routine downturns like inflation. Put plainly, a hedge fund seeks to eliminate the possibility of crippling financial losses for an individual or corporation. Swaps, stocks, options and even exchange-traded funds are a way to indemnify one’s money against a harsh downturn. With the U.S. Federal Reserve printing more money, protection against inflation is almost a must-have these days, and any financial analyst can look at your assets and tell you if it’s for you. Here’s what you should know if you’re in need of some protection:
Futures Contracts as Hedges
Futures contracts are a popular way of hedging the current value of energy, interest-rate changes and the price of precious metals. In essence, a futures contract with any of these commodities will set a price today for a future transaction. This strategy is useful for hedge funds, because it takes the guesswork out of exchange-traded funds and market fluctuations.
Precious Metals for Tomorrow
A precious metal is usually rare and possesses a high economic value. Additionally, precious metals are usually ductile with an outstanding lustre. The most-traded precious metals are gold, silver, palladium and platinum. Any of these precious metals are promising hedges against inflation. According to Monex, gold has risen nearly two hundred dollars over three months from a recent downswing in value that had investors panicking.
One chief feature of a hedge, though, is resiliency. In this instance, gold was promised not to dip below approximately $1,200, which is the de facto price of mining it. Right now is an excellent time to invest in gold as a hedge because gold is showing an uptick in value and it can’t feasibly fall below a certain price.
Hedges and Law of Supply and Demand
As commodities like soy and wheat can yo-yo in price due to the law of supply and demand, hedge investors may look to futures contracts for more financial certainty and retirement protection. Futures for wheat, for instance, work by the farmer estimating the approximate size of his current season’s crop and effectively locking in a wheat price based on potential yield.
This protocol helps both the farmer and investor because the farmer is now protected against downturns in the value of wheat via locking in the price early and the investor already knows the price of tomorrow’s wheat. This allows the investor to hedge with confidence and avoid extreme financial losses at the hands of inflation.
Closing Arguments on Hedge Funds
Hedge funds are an economic tool used to protect against currency and market fluctuations. Common devices for hedging are futures and precious metal investing. There are inborn mechanics to indemnify the investor in both cases.
Works Consulted – http://www.monex.com/prods/gold.html
Joseph Rodriguez writes about finance. His recent work is a piece on the Top Online Bachelors in Accounting Programs.