Many people may know the phrase to “hedge your bets” without actually knowing where it comes from or what it really means in a gambling sense. The origins of the word are of less concern here, though for the record it dates back to the early 1600s (or maybe even earlier) and comes from the practice of “hedging” a piece of land – limiting it in size through the use of hedges to divide it up. Thus it came to take on the meaning of limiting one’s risk and that is principally to what hedging refers in the context here.
Technically speaking, when we talk about hedging a bet we mean placing an alternative bet or bets that limit the overall risk. However, increasingly hedging can be equally employed to mean locking in an overall profit by placing further bets.
Assuming you place a bet on Leeds United to win the FA Cup before the season begins at very nice odds of 250/1 you may choose to hedge that bet if they progress to a certain stage of the competition. For example, should they make the semi-finals the odds on them winning will probably drop to closer to 18/1 meaning that you could place bets on all the other sides left in the competition in order to guarantee a profit. Alternatively you could use a betting exchange to lay Leeds, thus securing the same or similar overall outcome of a guaranteed profit no matter what.
This is technically trading but trading a bet (backing or laying at one price in the expectation the odds will change and thus allowing you to place a profitable counter wager) is very similar to arbitrage and hedging, trading and “arbing” are all very closely linked.
Another similar example of hedging a bet would be if you place a large accumulator and the first nine of 10 selections all win. Be they horse races, football matches or anything else, you have the potential for a large profit but equally if that one final leg lets you down you win nothing. By laying the final selection – or betting on all the other possible outcomes – you hedge the bet and “lock in” a certain profit.
Hedging in the more traditional sense, however, means to place bets to limit your possible losses. So, if we assume you backed England to win the World Cup (what were you thinking?!) but then after the draw for the groups is made you decide your bet wasn’t such a good idea, you could hedge the bet by laying England to confirm a guaranteed – but smaller loss – or you could hedge the bet by placing wagers on Brazil, Germany and Argentina.
In this last sense hedging is not strictly limiting your losses but spreading your risk across a number of different outcomes. You could lose more but in practice you have an excellent chance of one of your bets winning to produce either an overall profit or a small loss.
As you can see, to hedge is a term that can mean many different things in the world of gambling and also in the financial world. In essence, any bet made after an original bet and placed on a different selection with the intention of changing the overall amount and pattern of risk, can be viewed as a hedge.