On Wall Street, traders who manage portfolios worth millions, if not billions, of dollars need a way to offset the risk of losing too much of that money. One way to accomplish this is to use a hedge. If you’re betting the market overall is going up, and have millions invested in that gamble, you might want to spend a smaller amount of money also betting it goes down. This limits the upside of your original bet, but it also limits your downside risk.
Michael Bloomberg’s Big Hedge