Typical reasons given for hedging are:
* To reduce risk (limit downside);
* To "lock in" returns (as an investor) or cost of funds (as a borrower);
* To generate more predictable earnings.
All of these arguments for hedging essentially have to do with reducing price swings in one's portfolio.
But, is this volatility reduction really needed? For a short-term trader operating with high leverage (or for a leveraged corporation managing both assets and liabilities), hedging is a prudent way to reduce the likelihood of going belly up. Without buying puts or using stop losses (or swaps and swaptions at the institutional level), a leveraged portfolio manager could very easily be hit hard and even toppled by market volatility.
My investment style is to operate with little to no leverage, having assets but no liabilities (see my 21-Mar-2005 post, "Unleveraged Portfolio Management"). Without leverage, large price swings can never put me out of business. Consequently, for survival purposes, I do not have a need to hedge like a leveraged short-term trader or a leveraged corporation or financial institution does.
An ancillary benefit of not hedging is that I avoid paying fees and bid-ask spreads which can be very significant in the options area. Futures offer a more efficient way to hedge a position, but even here round-trip fees from regularly adjusting delta hedges and rolling positions forward can degrade otherwise healthy portfolio returns.
By not taking short-term profits and losses that inevitably result from applying hedging techniques, I also avoid paying taxes earlier than I need to. In my long-term investment portfolio, I am able to defer taxes indefinitely (i.e., until the time that I decide to sell a profitable position).
Operating unhedged, I accept volatility and would even say that this volatility works in my favor (see my 29-Jan-2005 post, "Merits of Volatility in a Portfolio"). History shows that equity markets rise over the long run. So, if the market is down one month, I see little reason to fret--the market is bound to make up for lost ground and could even rise to new heights a lot sooner than popular opinion would suggest.