What does Natural Hedge mean?
A strategy of hedging financial risk through investing in two dissimilar financial instruments which performance tends to cancel out each other with the change in economic environment.
Futures Knowledge Explains Natural Hedge
A natural hedge is a strategy of investing in two different class of assets which behave differently in any particular economic scenarios. The strategy allocates a quarter of a portfolio’s risk to each of these scenarios. It is not same as allocation of assets, it is allocation of risk. Cash flows from each cancel out some particular risk. When things go bad for one, they go well for the other, and vice versa. Cash flows from each cancel out some particular risk. When things go bad for one, they go well for the other, and vice versa. For example, an oil producer which exports crude to the US is naturally hedged against foreign currency exposure due to dollar-denominated operating expenses.