A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging transactions purchase opposite positions in the market in order to ensure a certain amount of gain or loss on a trade. They are employed by portfolio managers to reduce portfolio risk and volatility or lock in profits. Hedging transactions are subject to ordinary gain and loss tax treatment. However, hedging losses of limited partners are usually limited to their taxable income for the year. Hedge funds use this sort of transaction extensively.