A short position does not yet mean a hedge
Opening a short on TradFi Perp against a long position does not automatically eliminate the risk completely.
For a true hedge, at least four things must match:
1. The underlying asset.
2. The notional size of the exposure.
3. The holding period.
4. The reaction of both instruments to the market.
Even when the asset names are similar, there are still basis risk, funding, different liquidity, and pricing differences outside the hours of a traditional exchange.
Therefore, I would assess a hedge not by the number of open positions, but by the net exposure after them. If the underlying asset moves by 1%, how much does the entire portfolio change?
A short can reduce risk. But without the right size and time horizon, it can end up creating a second separate bet.
#TradFi
Opening a short on TradFi Perp against a long position does not automatically eliminate the risk completely.
For a true hedge, at least four things must match:
1. The underlying asset.
2. The notional size of the exposure.
3. The holding period.
4. The reaction of both instruments to the market.
Even when the asset names are similar, there are still basis risk, funding, different liquidity, and pricing differences outside the hours of a traditional exchange.
Therefore, I would assess a hedge not by the number of open positions, but by the net exposure after them. If the underlying asset moves by 1%, how much does the entire portfolio change?
A short can reduce risk. But without the right size and time horizon, it can end up creating a second separate bet.
#TradFi