Hedged Portfolios are investment collections constructed with the explicit objective of mitigating specific market risks through the strategic use of offsetting positions. In crypto investing, this involves combining long positions in digital assets with short positions or derivatives (such as options or futures) designed to reduce potential losses from adverse price movements in the underlying assets.
Mechanism
The mechanism for creating a hedged portfolio typically involves algorithmic execution of trades across multiple instruments and platforms. For instance, an institutional investor holding a significant Bitcoin spot position might simultaneously purchase Bitcoin put options or enter into a short Bitcoin futures contract. These operations are often managed through smart trading systems that dynamically adjust hedge ratios based on market volatility and desired risk parameters.
Methodology
The strategic advantage of hedged portfolios lies in their ability to preserve capital and reduce overall portfolio volatility, albeit often at the cost of limiting upside potential. This methodology is critical for institutional participants in the crypto space, particularly for managing exposure to volatile assets, facilitating structured products, or optimizing risk-adjusted returns in complex options trading strategies. The aim is to achieve a more predictable risk profile.
Portfolio margining enhances capital efficiency by calculating collateral requirements on the net risk of a hedged portfolio, not its gross components.
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