This term is often used but not understood. Hedging is a technique for removing specific risks from a position by entering an offsetting short position. Most often, it is used to remove market risk - beta - from a stock position, so that the return on the position becomes that of the outperformance of the position (plus the interest on the proceeds of the short), its excess return or alpha. In the trivial case of a perfect hedge, where the hedge is identical to the original asset, then the net position should earn the market risk-free return, typically the T-bill interest rate.

For example, to hedge a stock portfolio one might short the S&P futures, in effect going short the S&P 500 index basket of stocks. The return on this position would then be the risk-free return plus the performance of the portfolio relative to the S&P 500 index.