Which of the following best defines hedging in investment?

Hedging in investment is primarily understood as a method to offset potential losses in an asset. This strategy involves taking an opposite position in a related asset to mitigate risk. By using various financial instruments, such as options, futures, or other derivatives, investors can create a protective position that helps safeguard against adverse price movements.

The essence of hedging lies in its risk management capabilities; it allows investors to provide some level of insurance against market volatility or adverse events that could negatively impact their holdings. For instance, if an investor holds a stock that they believe may decline in value, they could purchase put options on that stock. Should the stock's value decrease, the gains from the put options can help cover the losses from the stock itself.

In contrast, strategies aimed at maximizing potential returns or market timing do not inherently address risk in the same fundamental way as hedging. High-risk investing involves seeking out investments with higher expected returns but often at the cost of increased volatility and potential losses, which is not the essence of what hedging is all about. Therefore, the definition that positions hedging as a risk management tool aiming to offset losses is the most accurate representation of this investment practice.