What is risk hedging?
We should first understand the modern modern portfolio theory (put forward by American economist Harry markowitz). It divides investment risk into two types, one is individual risk and the other is system risk. For example, if you buy A shares, you have to bear the risks of A shares. Maybe the bull market is coming, BCDE shares are rising, but your A shares are not. This is called individual risk, also called unsystematic risk. On the other hand, no matter whether you buy A shares or ABCDE shares, you can't escape the risk of stock market crash, which is called systemic risk.
How to resolve these two risks?
Markowitz's answer is to build an optimal portfolio. If you want to avoid individual risks, don't just buy one stock, but buy a basket of stocks, so that even if a stock encounters an emergency and plummets, it won't have much impact on your overall portfolio; If you want to avoid systemic risks, you can't just buy a basket of stocks, but buy different types of assets, so as to form a more complex and diversified investment portfolio. We often say "Don't put your eggs in one basket", which is the most popular metaphor of diversified modern portfolio theory.
Therefore, according to modern portfolio theory, when a fund buys stocks and bonds at the same time, the overall risk-return ratio or cost performance ratio is higher than that when you buy stocks or bonds alone. Because if bonds fall, stocks are likely to rise. If stocks fall, bonds may rise and some of their risks are hedged. Because the relationship between stocks and bonds is basically negatively correlated. This is the advantage of a balanced fund.
Flexible allocation of funds also has a greater advantage, that is, the position changes are very free. The proportion of stocks and bonds can be adjusted as long as it is within the scope stipulated by hybrid funds. Fund managers feel that the stock market is good, which can greatly increase the proportion of stocks, and that the risk of stocks is too high, which can also greatly increase the proportion of bonds. For example, when the stock market plummets, the fund manager clearly knows that the stock market will fall next, but because the trader is a stock fund, he can only reduce the stock position to 80% at least, which will cost a lot of money. When the market is in a downturn, the ground is full of cheap goods that no one wants, and fund managers obviously want to buy them. Unfortunately, it is a greedy bond fund. In contrast, fund managers of flexible allocation funds are free to buy and sell if they want.