What does it mean to "hedge" an investment?

Hedging an investment refers to the strategy employed to reduce the risk of adverse price movements in an asset. This is achieved by taking an offsetting position in a related asset or derivative, which can help protect against losses in the original investment. For instance, an investor might purchase options or futures contracts that would gain value if the price of the underlying asset falls. The purpose of this approach is to mitigate potential losses by strategically balancing the exposure to price fluctuations, thereby providing a form of insurance for the investment. This risk management technique is widely used across various financial markets to safeguard portfolios against volatility and unexpected changes in market conditions.