Multi-directional profiting is a rare but well-defined phenomenon that is made possible by highly complicated and intricate hedging strategies.
In multi-directional profiting, an investor hedges against his investment in a very precise manner so as to profit regardless of the way his investment moves. First, the investor bets that his investment value will move in one direction and trades securities to reflect that bet. Second, the investor hedges his bet in such a way that he still profits, albeit significantly less, should the investment's value move in the reverse direction.
Multi-directional profiting rarely occurs in reality due to its extreme difficulty in identifying such an opportunity. In many cases, a strategy for multi-directional profiting requires a lot of capital and may contain risks that the investor cannot foresee. The collapse of Long-term Capital Management[1] resulted from unforseen risks associated with multi-directional profiting.
References
- ↑ Long-term Capital Management, Wikipedia, Retrieved Jan 05, 2009
