partial hedge
Partial hedge is when you protect only part of your position from loss, so some risk is covered and some is left exposed on purpose.
In plain English
Remember when NEPA, sorry, PHCN, sorry, the light company, would take the light and you had a small generator that could only carry the fridge and two bulbs, not the whole house? The TV and the freezer stayed off. You did not protect everything, you protected the part that mattered most and let the rest wait. That is exactly what a partial hedge is.
In investing, hedging is the umbrella you carry when rain has been threatening since morning. A full hedge is a big umbrella that covers your whole body, meant to protect all your money from a fall. A partial hedge is the small foldable one that covers your head and shoulders but leaves your shoes to get wet. You are still exposed, just less than before.
Say a trader in Lagos holds ₦5,000,000 worth of Dangote Cement shares and is nervous about the market for the next month, but not nervous enough to give up all the upside if the price rises. She might buy put options covering only ₦2,000,000 of that position. If the price falls, that portion is cushioned. The remaining ₦3,000,000 rides the market fully, for better or worse.
A diaspora investor in Manchester holding a mix of United Kingdom index funds and shares in a Nigerian bank might do the same thing with currency. He hedges half his naira denominated exposure against a possible fall in the naira, using a forward contract, but leaves the other half unhedged because he still believes the exchange rate could move in his favour over time.
People choose partial hedges because full protection is expensive and sometimes unnecessary. Hedging costs money, whether through options premiums or fees, and covering every single risk can eat into returns that were never in serious danger. A partial hedge is a compromise, a way of saying I want some sleep at night, but I am not ready to pay for a bulletproof vest when a good jacket will do.
An investor holds ₦4,000,000 in bank shares and buys put options on only ₦1,500,000 of that value. If the shares crash by 30%, the hedged portion loses far less, while the remaining ₦2,500,000 takes the full hit.
Questions people ask
Why more than hedge the whole position and remove all risk?
Full hedging costs more, whether in fees, premiums, or missed gains, and it can cancel out the very returns you invested for. A partial hedge balances protection with the cost of that protection.
How does someone decide how much of a position to hedge?
It usually comes down to how much loss they can stomach, how confident they are in their own view of the market, and how expensive full protection would be compared to leaving part of it exposed.
Can a partial hedge still lose money?
Yes. The unhedged portion behaves exactly as if there were no hedge at all, so it can still fall in value. The point is not zero risk, it is reduced risk on part of the holding.
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