I have been trying to wrap my head over this question but just cannot do so. Try googling stock index futures hedging and all the search results will tell you hedgers sell index futures contracts for hedging purposes. Most people own shares, so hedging means they sell futures contracts. So, who are the hedgers who buy index futures? In a bear market, speculators will sell index futures. Hedgers always seem to sell index futures anyway. So, in a bear market, who are buying index futures? Are there hedgers who buy index futures or are the buyers mainly speculators?
I don't know but this isn't really needed information IMO in order to trade. Lots of new traders get sucked into needing to know WAY too much information.
Both. Anyone with a position to protect can play the opposite side with a futures contract for a hedge.. Players long/short hedge SP futures the same as buying/shorting SPY.
it will be easier for you to grasp this concept you are trying to conceptualize if you think of the markets as a place where people express their outlook thru buying and selling decisions WITH varying risk profiles and expectations and most important have their own timeframe with which to wait out those expectations- so to group everyone as "hedgers" who buy during bull periods, etc is not going to help you understand what you seek. Not to mention, 1 person's bull market in 1 timeframe is another person's bear market in another timeframe.
If you're long a large position in a stock which you expect to hold long term but there's some short term risk of an adverse price movement, what are your options? 1. You can hold the position and ride out the adverse price movement - not good risk management / can be very costly. 2. You can cover the risk by selling stock futures or buy put options - good risk management / cost effective 3. Unwind your position and buy it back - good risk management / not practical / costly. Same happens in the reverse if you're short a stock. Edit: Just noticed this is about index futures. My guess is this would then apply to holders of a long stock portfolio strongly correlated to the S&P index or SPY ETF or stock/portfolio holders that think there's significant market risk on the horizon.
Suppose you identified some 30 stocks which you believe would perform worse than the overall market. You could then sell short the basket of these 30 stocks, and go long the equivalent amount of the broad market. What you have now is a spread. If you are right (in that these 30 stocks would do worse than the index), then you make money no matter where the overall market moves, up or down.
As @lovethetrade described, one long hedging category would be the fund managers/PMs who have to adjust/rebalance large positions, or anticipating buying ABC and XYZ in size and so hedge against the market running ahead before they've bought what they want (given that the stock futures if they exist might not have the liquidity).
Clearly a poster should be limited to opening only one thread per day, or per week. If not per month! https://elitetrader.com/et/threads/thread-proliferation-curtailment.311329/ Perhaps https://en.wikipedia.org/wiki/Market_maker ???
I will leave this to Baron if he thinks my threads are stupid and a waste of time to forummers here. However, if the questions are reasonable and contribute to the knowledge of this forum, why limit it? Good threads provoke thought and discussion among the elite traders here. Should there a rule that prevents a student to ask too many questions during a discussion? Should a teacher tell your child to shut up if he asks too many questions?