Hedge Your Bets Meaning – What Is Hedging Your Bets?

When I first started working at a hedge fund, I had the ironic question of what does hedging your bets mean. Years of experience later, I developed a really good understanding of the meaning of hedge your bets. Read on below to find the meaning of hedging your bets and a short, simplified example that will solidify the concept for you.

Hedge Your Bets Meaning

Simply put, to hedge your bets means to eliminate your chance of loss by counterbalancing it with another bet. As a result of properly hedging your bets, you won’t gain or lose anything, but rather you will net zero.

Hedging Your Bets Example

An example best illustrates the concept of hedging your bets. Let’s use a sports betting example.

Say you bet your buddy Marc $20 that the Miami Dolphins will beat the Baltimore Ravens in next Monday’s football game. Later that week, you find out that the Dolphins’ quarterback is out for two weeks with an injury. You know darn well that the Dolphins have no chance against the Ravens without their star quarterback. But you can’t retract your bet with Marc.

So what do you do? You hedge your bets.

In this case, you make another bet with Harry—$20 that the Ravens will beat the Dolphins. At this point, no matter what happens, you won’t lose any money. You have essentially hedged your bets.

To some degree, this is what hedge funds do in order to mitigate risk. That’s actually why hedge funds are called hedge funds.

As a former software engineer at a hedge fund, I can say that it gets much more complicated than this hedging your bets example. Nevertheless, this example does a good job of illustrating what hedging your bets means.

Can you think of a time where you successfully hedged your bets? It doesn’t necessarily have to involve money. Let me know in the comments below.

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