The so-called "hedging" is to use a certain cost to "wash out" risks in transactions and investments to obtain low-risk or risk-free profits, which is the so-called "arbitrage". Hedge funds, as the name suggests, are funds that adopt a "hedging" operating strategy.

There are many hedging methods, including futures and spot price difference hedging, far and near contract hedging, geographical hedging of the same product, hedging of related products, and derivatives such as hedging agreements. In a narrow sense, hedging is just a trading strategy and does not involve any financial conspiracy theory. More often than not, most of what you hear about the industry is demonizing the name hedging.

To give a few examples (all are examples of various financial products and derivatives, transactions generally do not involve physical transactions):

The copper price in London is 70,000/ton, and The copper price in Shanghai is 50,000/ton. You know that the price cannot always be so different: there will be many people selling Shanghai copper to the London market, so the price will become consistent.

So you judge that the price difference between London and Shanghai will narrow, so you short London copper futures and buy Shanghai copper futures at the same time. Then no matter whether the final trend of copper is up or down, as long as the price difference between London and Shanghai disappears , you can make a profit. This is the so-called geographical hedging of the same product.

You also find that the coal futures price in December is 1,000/ton, while the coal price in January next year is 500/ton. Similarly, you know that this price difference will still converge, because everyone will wait until January to buy coal, and the price of coal in December will therefore drop.

So you go short December coal futures and go long January coal futures. Before the futures delivery date at the end of the month, December coal has indeed fallen back to 850, while January coal has risen to 600. This is a far and near contract hedging.

The same goes for stocks. If you assume that PetroChina has a high correlation with the market's points (which is indeed the case), then you find that PetroChina has risen about 5% slower than the market in a few days, then you can buy PetroChina and short the stock index futures at the same time. . This is a related product hedge.

It is also uncertain whether the profit potential of the hedging arbitrage results will be reduced due to the different "pairings" selected. In the example above, the results of hedging far and near contracts may even exceed those of ordinary trading.

On the other hand, since the traditional hedging and arbitrage model requires a certain cost to offset risks, some aggressive companies will use more timing speculation to obtain unilateral profits. But this definitely increases transaction risks. Generally speaking, this industry has frequent transactions, many information sources, and many industries involved.

In addition, due to their frequent transactions, hedge funds adopt trading strategies that may be radical, weird, or ordinary, but they all require large amounts of capital and relatively stable investors, so they are unlikely to compete with public funds and banks. Deposits are related. The fundraising form is similar to a closed-end fund, and the operation form is similar to a trust account and sunshine private equity.