What does "hedging" aim to achieve in an investment strategy?

Hedging is an investment strategy that seeks to reduce the risk of adverse price movements in an asset. By using various financial instruments, such as options, futures, or other derivatives, investors can protect themselves from potential losses that may arise due to market fluctuations. The primary objective of a hedge is to offset potential losses in one position by making a counterbalancing investment.

This approach does not aim to maximize gains or increase overall market exposure; rather, it focuses on risk management. While hedging can lead to less volatility in the investment's performance, it does not guarantee the elimination of all investment risks, as market conditions can still impact hedged positions. Therefore, hedging's core purpose is to mitigate exposure to unfavorable price movements, making the option of reducing the risk of adverse price movements the most accurate description of its aim.