Natural Hedge
Candlefocus EditorIn addition to these benefits, a natural hedge offers portfolio diversification opportunities and potentially higher returns. This is especially true for investors who seek to achieve some capital growth through the selection of assets with returns that are not strongly correlated to each other. For example, a natural hedge could involve the purchase of stocks from different sectors or industries. By doing so, the investor can create a portfolio that provides protection from market risk, low volatility and high returns.
For corporations, a natural hedge can be used to minimize losses and maximize profits over a long-term period. This involves the practice of internal portfolio rebalancing, where losses in one part of the business are offset by profits from another. An example of a natural hedge in this context is when a company that manufactures energy-efficient lights markets a new, more efficient product and simultaneously scales back production of its older, less efficient product. In this case, the losses in production costs incurred by the older, less efficient product are offset by the higher profits generated by the newer, more efficient product.
In summary, natural hedging can be a powerful risk management strategy when implemented correctly. It allows investors and financiers to protect themselves from market risks, while diversifying and potentially increasing their returns. It also allows corporations to maximize efficiency and profits. However, it is important to note that there is no one-size-fits-all solution for natural hedging, and investors and corporations alike should do their due diligence to ensure that their approach is suitable for their individual goals.