Forex Hedging Tutorial: Why Forex Hedging Is a Bad 'Bet' For Most

Forex hedging is not for beginners, nor for those without a significant pool of risk capital to invest. In fact, hedge funds - generally speaking - are not wise investments for the average person.

 

If you are just getting your feet wet in the investment game, you might be tempted towards Forex hedge funds. After all, a properly managed fund can yield returns higher than 500 percent - and even higher if you're the fund manager. It is easy to see why a beginner could get sucked into this fairy-tale scenario.

 

My recommendation, however, is that you steer clear of hedging until you have several years of successful trading experience under your belt - not to mention disposable income - and I'm going to explain why right here and now.

 

First, let's discuss hedge funds.  What are they, exactly?

 

Hedge funds are private investment partnerships, usually managed by wealthy individuals - e.g. - other investors, business people, commodity pool operators and all-around financial tycoons.

 

However, the Securities and Exchange Commission does not impose any strict rules on who may start a hedge fund. In fact, if you won the lottery tomorrow, you could start your own hedge fund.  This free-market, 'anyone can play' philosophy is the first high risk factor that should steer you clear of Forex hedging.

 

The second factor is the high risk associated with the strategies involved in hedge fund trading. You've probably heard about futures contracts, derivatives, 'put' options and the like, yes? 

 

If you've been doing your homework, then you already know that these 'investments' revolve around the highly speculative trading strategy of 'selling short'. Really, this is why we call it 'hedging':  you're hedging your bets either for or against the given financial instrument based on short-term market fluctuations.

 

It is difficult enough for the average investor to predict short-term movements on every day stocks; but, try doing so on the even more volatile foreign exchange market and you'll understand why Forex hedging is so risky.

 

It takes years of experience, coupled with a very sophisticated understanding of the world economy, to profit from a Forex-based hedge account, and even more to manage one.

 

So, if you are investing for your future, your family's future, your children's education or any other closely held dream, then I suggest you stick to the time-honored mid and long-range investment strategies like stocks, bonds and IRAs. There are plenty of high-yield options in the latter category, especially.

 

And if it is wealth you're looking for, then consider starting your own business. A second income can help you get out of debt, and sock even more money into savings and investments.

 

Remember: real wealth is built on a foundation of security..and that's the smartest 'hedge' you can make for your financial future!