Hedging is any business and INVESTMENT activity entered into to reduce RISK rather than to produce earnings. For example, a farmer makes a decision on how much wheat to plant. At the current price of wheat, he will make a good PROFIT, and if the price of wheat rises, it will be especially profitable, but if the price falls, it will be unprofitable. To hedge for this uncertainty, he can enter into a FUTURES contract for wheat, which will be profitable to him if the price of wheat falls and unprofitable if the price rises. The risk of this futures CONTRACT offsets the risk of growing the wheat. In essence, the farmer has shifted the risk of the falling prices to the other person in the futures contract. An investor must not think that a HEDGE FUND provides the investor any sort of protection against risk; in fact, the opposite is true. A hedge fund takes on risk by entering into contracts that hedge the risk for other businesses, so it would possibly be the other party in the contract with the farmer in the above example. If that is so, the investors in the hedge fund now have the risk of changes in wheat prices. Hedging does not apply only to investment instruments; it should also be part of any sound BUSINESS PLAN. To hedge against bad economic times, a cruise-ship line can invest in a chain of movie theaters. During slow economic times, the cruise ships will lose money, but the movie theaters will make a profit, and vice versa. Each division serves as a hedge for the other.