Hedged Portfolio

A hedged portfolio uses offsetting positions to reduce risk from adverse price moves. The hedge can be partial or full and may target market beta, specific sectors, or individual exposures.

Common hedging methods

• Shorting index futures to reduce equity beta.
• Buying put options to protect downside.
• Pairing long and short positions in similar companies.
• Using currency or rate hedges for international exposure.

Benefits

Hedging can reduce volatility and drawdowns, but it often reduces upside. The balance depends on the investor’s objectives.

Example

A portfolio manager holds a concentrated tech stock basket and sells index futures to reduce overall market exposure while keeping stock selection exposure.

Risks and costs

Hedges cost money through premiums, carry, or opportunity cost. Poorly sized hedges can also introduce new risks or create tracking error.

Practical checklist

• Define the time horizon for Hedged Portfolio and the market context.
• Identify the data inputs you trust, such as price, volume, or schedule dates.
• Write a clear entry and exit rule before committing capital.
• Size the position so a single error does not damage the account.
• Document the result to improve repeatability.

Common pitfalls

• Treating Hedged Portfolio as a standalone signal instead of context.
• Ignoring liquidity, spreads, and execution friction.
• Using a rule on a different timeframe than it was designed for.
• Overfitting a small sample of past examples.
• Assuming the same behavior in abnormal volatility.

Data and measurement

Good analysis starts with consistent data. For Hedged Portfolio, confirm the data source, the time zone, and the sampling frequency. If the concept depends on settlement or schedule dates, align the calendar with the exchange rules. If it depends on price action, consider using adjusted data to handle corporate actions.

Risk management notes

Risk control is essential when applying Hedged Portfolio. Define the maximum loss per trade, the total exposure across related positions, and the conditions that invalidate the idea. A plan for fast exits is useful when markets move sharply.

Variations and related terms

Many traders use Hedged Portfolio alongside broader concepts such as trend analysis, volatility regimes, and liquidity conditions. Similar tools may exist with different names or slightly different definitions, so clear documentation prevents confusion.

Practical checklist

• Define the time horizon for Hedged Portfolio and the market context.
• Identify the data inputs you trust, such as price, volume, or schedule dates.
• Write a clear entry and exit rule before committing capital.
• Size the position so a single error does not damage the account.
• Document the result to improve repeatability.

Common pitfalls

• Treating Hedged Portfolio as a standalone signal instead of context.
• Ignoring liquidity, spreads, and execution friction.
• Using a rule on a different timeframe than it was designed for.
• Overfitting a small sample of past examples.
• Assuming the same behavior in abnormal volatility.

Data and measurement

Good analysis starts with consistent data. For Hedged Portfolio, confirm the data source, the time zone, and the sampling frequency. If the concept depends on settlement or schedule dates, align the calendar with the exchange rules. If it depends on price action, consider using adjusted data to handle corporate actions.

Risk management notes

Risk control is essential when applying Hedged Portfolio. Define the maximum loss per trade, the total exposure across related positions, and the conditions that invalidate the idea. A plan for fast exits is useful when markets move sharply.

Variations and related terms

Many traders use Hedged Portfolio alongside broader concepts such as trend analysis, volatility regimes, and liquidity conditions. Similar tools may exist with different names or slightly different definitions, so clear documentation prevents confusion.

Practical checklist

• Define the time horizon for Hedged Portfolio and the market context.
• Identify the data inputs you trust, such as price, volume, or schedule dates.
• Write a clear entry and exit rule before committing capital.
• Size the position so a single error does not damage the account.
• Document the result to improve repeatability.

Common pitfalls

• Treating Hedged Portfolio as a standalone signal instead of context.
• Ignoring liquidity, spreads, and execution friction.
• Using a rule on a different timeframe than it was designed for.
• Overfitting a small sample of past examples.
• Assuming the same behavior in abnormal volatility.

Data and measurement

Good analysis starts with consistent data. For Hedged Portfolio, confirm the data source, the time zone, and the sampling frequency. If the concept depends on settlement or schedule dates, align the calendar with the exchange rules. If it depends on price action, consider using adjusted data to handle corporate actions.