What is the primary concept behind a hedging/return-seeking portfolio approach?

The primary concept behind a hedging/return-seeking portfolio approach is centered on the idea of effectively managing risk and maximizing returns through diversification of investment strategies. By separating assets into hedging and return-seeking portfolios, investors can address different objectives within their overall investment strategy.

In this approach, the hedging portfolio is designed to mitigate risks associated with certain market conditions or specific asset classes. It generally includes assets that are expected to perform well during times of market stress or volatility, which helps to protect the investor’s capital. On the other hand, the return-seeking portfolio comprises assets aimed at achieving growth and capital appreciation. This typically involves investments in equities or other growth-oriented assets, which are expected to yield higher returns over the long term.

This separation allows investors to maintain a balance between safeguarding against unforeseen losses while still pursuing performance-oriented goals. By structuring their investments in a way that distinguishes between risk management (hedging) and growth (return-seeking), investors can optimize their asset allocation to align with their specific risk tolerance and investment objectives.

In contrast, focusing solely on equity markets or consolidating all assets into one portfolio might expose the investor to higher volatility without adequate risk management. Similarly, an exclusive focus on fixed income would limit the potential