Hedging Strategies
Protect your portfolio and manage risk with practical hedging patterns. This guide covers hedging primitives, concrete examples, operational advice, and monitoring best practices for perpetuals.
Why hedge?
Hedging reduces unwanted directional exposure and protects portfolio capital from large adverse moves. For LPs, traders, and market makers, a good hedge improves risk-adjusted returns by separating alpha (strategy edge) from market beta (directional risk).
- • Preserve capital during sharp drawdowns
- • Lock-in realized gains while retaining upside optionality
- • Reduce margin requirements and liquidation risk
Core primitives
Futures / Perpetuals
Use opposite-direction perpetual/futures positions to offset spot or portfolio exposure. This is the most direct and capital-efficient hedging primitive on dotmx.
Options & Collars
Options can create asymmetric protection — e.g., buy puts or construct collars (long spot + short call + long put) to cap downside while keeping limited upside.
Delta-neutral LP / Rebalancing
For liquidity providers, keep the pool dollar exposure balanced via automated rebalancing, or hedge net delta with futures.
Cross-venue Basis / Funding
Arbitrage/funding strategies hedge exposure by offsetting positions across venues to capture basis or positive funding while remaining directionally neutral.
Practical examples
1) Trader hedges a long spot position
You hold 10 ETH (spot). To neutralize direction, open a short 10 ETH-equivalent perpetual. If ETH moves +/- the hedge will offset PnL, allowing you to extract funding or trade the basis instead of being exposed to price direction.
2) LP protects against drawdown
An LP with concentrated BTC exposure hedges 50% of pool delta by shorting BTC perpetuals roughly equal to half their net BTC value. This reduces portfolio volatility while preserving fee income.
3) Delta-neutral carry
A market maker runs symmetric long/short futures with small directional bias while capturing funding and bid/ask spread. Trades are rebalanced continuously to maintain delta near 0.
Execution patterns & sizing
- • Size hedges to the notional exposure (e.g., hedge net USD delta).
- • Use staggered entry (ladder) to reduce slippage on large hedges.
- • Prefer continuous micro-rebalances for market making; discrete futures hedges for periodic portfolio protection.
- • Factor funding vs borrowing costs: sometimes partial hedges are cheaper and more effective than full hedges.
Risk & monitoring
Hedging reduces directional risk but introduces operational and basis risks. Monitor the following closely:
- • Mark vs funding mismatch (basis) — can erode hedge effectiveness.
- • Funding & borrowing costs — ensure hedge cost doesn't exceed expected alpha.
- • Liquidation risk on leveraged hedges — leave sufficient margin.
- • Execution latency and slippage — use limit/iceberg orders for large sizes.