You’ve probably heard of the expression “hedging your bets”. Hedging is used in many different scenarios in life and particularly in finance and investing. Simply put, hedging is all about using risk management to limit your exposure.
Whether in gambling or in market speculation of any kind, hedging is a strategy designed to limit or to offset the probability of losses from fluctuations in prices. There are many ways to hedge your bets, but it basically involves taking opposing positions in a market.
The aim of hedging is either to completely eliminate or to reduce the risk of a bet. This either happens as a deliberate pre-conceived strategy or when you’re no longer comfortable with the bet you’ve made.
Let’s take the UK’s biggest single betting event, the Aintree Grand National, as an example. Let’s say you think “Hedging Star” has a great chance months before the race and you place £10 on the horse at 1,000-1 in the ante-post market. Now let’s presume your selection was a shrewd one and the horse is 20-1 a couple of days before the race. Despite your small initial bet, you actually have a lot of money to lose here with a potential £10,000 on the table. So, you may decide to lay “Hedging Star” at 20-1 for £10 to guarantee you’re in a no-lose position and your only exposure is the £200 at 10-1, versus the £10,000 you’ll pocket if the horse wins. Alternatively, you may decide to lay the horse to the tune of, say, £500 at 20-1, thereby guaranteeing yourself £500 whatever the outcome of the race. Of course, you may decide on other amounts in between these two.
Alternatively, let’s say Manchester City are playing a non-league side in the third round of the FA Cup. Let’s also assume City are 1-20 (or 1.05) to win the match, and you decide to make what you perceive to be an “easy” £50 by placing £1,000 on City to win. But at half-time, the non-league side are holding on gamely and it’s 0-0 – and you’re getting nervous. In this scenario, you may decide to lay Man City back at say, 1-10 to lose £1,000. Now, you’re going to lose £50 whatever happens, but you aren’t going to lose your £1,000, so you may feel a little less worried.
Once you grasp the concept of hedging, you can often engineer positions so that you’re making a profit whatever happens – and can limit the size of your potential losses when things don’t go your way.