What is a consequence of lower cost hedging strategies?

Lower cost hedging strategies generally result in less robust protection against adverse movements in the market. While they are designed to mitigate risk, their reduced expense often correlates with limitations in their effectiveness. This means that while an investor may save on costs, the hedging instruments may not provide comprehensive coverage against potential losses. Thus, the portfolio could experience more significant downside risk due to inadequate hedging. Furthermore, if the hedging strategy is not well-structured, it could also limit the portfolio's ability to capitalize on upside potential during favorable market conditions. Therefore, choosing lower-cost hedging strategies can lead to a scenario where the portfolio has both diminished downside protection and reduced upside potential, making this choice a critical consideration in portfolio management.