An investment strategy designed to mitigate an existent risk. In this type of hedging, a security is usually short to offset a long position assumed in a previous transaction. The short hedge provides protection against potential losses in an investment that is held long. The potential gains from the covered (or long) position will help compensate the hedging investor for potential losses in the short position and vice versa. In other words, the short hedge implies the sale of derivatives (like futures or options) to guard off the possibility of price decline in the underlying securities or assets held long.

This hedge can help farmers or crop producers, for example, lock in a specific price of sale against a premium. In this sense, they can eliminate any downside movement in their corps’ market prices. Interest rate movements can also be hedged to mitigate the rollover risk in the future, especially in case of fixed income securities where downside changes in interest rates pose a serious threat to holders of such securities. The so called “basis risk” is commonplace in short hedging. Basis risk arises when price levels don’t experience a considerable change over the hedge period. The asset held long, in this case, would not increase in value, and the value of the short position would decline.