Which types of positions do hedge funds use to manage risk?

• A. Equity positions and derivative positions, including options and futures.
• B. Only equity positions.
• C. Only derivative positions.
• D. Cash holdings.

Answer: (A)

Managing risk in hedge funds comes from blending exposure types: equity positions and derivative positions. Equity positions let a fund participate in price moves and pursue stock-based bets, while derivatives such as options and futures provide flexible hedging tools that can limit downside, protect gains, or tailor risk without needing to own the asset outright. For example, owning stocks can be paired with protective puts to cap losses, or market/sector risk can be hedged with futures. This combination lets the fund reduce unintended risk while keeping upside potential. Relying only on equity positions leaves exposure unhedged, and using only derivatives without any underlying exposure can misalign with goals or add unnecessary complexity. Cash holdings, by contrast, mainly serve liquidity and capital preservation rather than actively managing risk through positions.