A pension fund manager is concerned about potential losses in the equity portfolio due to anticipated market volatility. She enters into a futures contract to offset potential losses in the underlying portfolio. This strategy is best described as:

Hedging is a risk management strategy where an investor takes an offsetting position in a related security or derivative to reduce the risk of adverse price movements in an existing position. When the fund manager enters a futures contract to counterbalance potential losses in the portfolio, she is hedging — not speculating (which involves taking on risk for potential gain) or arbitraging (which exploits price differences across markets). Diversification reduces unsystematic risk through variety of assets, while hedging directly neutralises a specific identified risk. Pension funds routinely use hedging instruments such as interest rate swaps, currency forwards, and equity futures to protect the corpus.