Hedging is a risk management strategy used by investors to protect themselves against potential losses in the market. However, hedging also comes with its own set of risks that investors must be aware of. One potential risk of hedging is the cost associated with the hedging instruments, such as options or futures contracts. If the hedging cost is too high, it can eat into the potential profits of the investment.

Another risk of hedging is the potential for the hedging strategy to be ineffective, resulting in losses both in the underlying investment and the hedging instrument. Hedging can also limit potential gains if the market moves in the investor's favor. In addition, hedging can be complex and require significant expertise to execute effectively, increasing the potential for errors and losses.

Hedging is often used to protect against adverse price movements, but it carries several risks of its own. One key risk is the cost of hedging, since using options, futures, or forwards requires fees, margins, or premiums that can reduce profits. Another issue is the possibility of over-hedging, where traders lock in too much exposure and miss out on favourable price moves. Timing also matters; a poorly timed hedge may fail to provide the intended protection or even increase losses. Market conditions can shift unexpectedly, making hedges less effective. Liquidity risk is another concern, as certain hedging instruments may be hard to exit quickly without incurring losses. Counterparty risk also exists, especially in over-the-counter contracts, if the other party defaults. Finally, complexity itself can be a risk, as managing multiple hedges requires strong discipline and understanding; otherwise, mistakes may amplify rather than reduce exposure.