It produces a non position in your portfolio. One position rises, the other falls in value for ideally no change. Hedging removes two times the position size from your portfolio. Effectively your portfolio is smaller.

Investors often use diversification or the purchase of bonds to reduce risk. The result is poorer performance. No one can consistently call market direction. The lost opportunity cost of trying to reduce portfolio risk is very high.

Hedging is best used in cases involving a physical asset. You use a similar paper asset to lock in the price. Examples are farmers and airline fuel prices.

As an investor if you want to be 100% hedged you should sell everything and buy the S&P. You have gotten rid of the individual stock risk and you own the market. If you go to all bonds you have a very large market risk. Remember if the market falls there is no relative loss. Your portfolio value falls but your performance is the same as the market. Both went down. The market will recover because it has risen about 10% per year over the past 100 years.

Stars doesn’t worry about hedging. It just buys many more shares at cents on the dollar in market corrections.