Question

Hedge Funds demand ETF for

Select one:

To obtain zero returns

To hedge market risk

To obtain negative returns

Answer 1

Hedging has historically been limited to the use of derivative-based securities like futures, options, and over-the-counter securities. Because the mechanics of the pricing of the derivative-based securities are based on advanced mathematical formulas, like Black-Scholes options pricing models, hedging has mostly been domain to large, sophisticated investors.

KEY TAKEAWAYS

• Exchange-traded funds can be used for hedging purposes.
• One strategy is to buy inverse S&P 500 ETFs, which move opposite to the stock market.
• Some exchange traded funds track the performance of the dollar against other currencies, which offer opportunities to hedge exchange rate risk.
• Buying shares of ETFs that hold commodities, like gold or natural resources, can be a way to hedge against inflation.

The ability to purchase and sell small increments of ETFs appeals to smaller investors who previously had limited access to hedging due to the larger minimum requirements associated with traditional protective strategies. In fact, there are a number of ways individual investors can use ETFs to hedge portfolios today.

Therefore The Answer will be to hedge the market risk.