A hedge is a position chosen because it should gain when another exposure loses. That sounds simple until we ask which loss we mean. A broad market decline, a fall in one company, and an adverse currency move are different problems.
The first decision is therefore the objective. Are you trying to reduce everyday fluctuations, protect against a particular event, or limit the loss below a certain price? A hedge can serve one of these purposes without serving the others.
The closest hedge is the same exposure
Suppose you own 200 units of an asset at $50, worth $10,000. Shorting 100 equivalent units reduces the common price exposure by half. If the asset falls $5, the holding loses $1,000 and the short gains $500 before costs. If it rises $5, the hedge gives up half the gain.
That symmetry is the cost of a linear hedge: it removes upside as well as downside. Selling half the original holding would produce a similar reduction in price exposure without maintaining two offsetting positions. A derivative may still be useful when selling is impractical, but it introduces its own funding, margin, and execution requirements.
A market hedge leaves company risk
Often the available hedge is an index rather than the precise assets held. The quantity then depends on how strongly the portfolio tends to respond to that index. Beta estimates that sensitivity from historical returns; a beta of 1.2 means a 1% index move has historically corresponded to roughly a 1.2% portfolio move, on average.
For a $50,000 portfolio with beta 1.2, reducing estimated beta to 0.6 calls for about $30,000 of short index exposure: $50,000 × (1.2 − 0.6). If each futures contract represents $6,000, that is five contracts. This is the approach described in CME's guide to stock-index futures.
If the index falls 5% and the portfolio follows its estimated beta, the portfolio loses $3,000 while the hedge gains $1,500. The net loss is $1,500. But if company-specific news makes the portfolio fall 12%, it loses $6,000 while the same hedge still gains only $1,500. An index hedge cannot be expected to remove news unique to the holdings.
Correlation determines how much is hedgeable
Beta is a useful sizing estimate, not a promise about the next move. A portfolio can have a measurable average sensitivity to the index and still have large movements the index does not explain. The weaker that relationship, the more independent risk remains after the hedge.
This is why matching dollar amounts is not enough. Shorting $10,000 of a low-volatility index against $10,000 of a volatile stock produces zero net dollars but can leave substantial market exposure. Estimate the relationship over a period relevant to the intended holding period, then examine whether it survived the kinds of stress you care about.
Protection and financing are separate
A physically settled put gives a right to sell its underlying at the strike under its exercise terms; a cash-settled put pays the contract’s defined cash amount instead. American-style puts permit early exercise, while European-style puts can be exercised only at expiry. These settlement and exercise terms, along with the premium, determine the protection purchased. That differs from a short position, which offsets gains as well as losses. The put's strike, expiry, underlying, and contract size must match the protection sought; a broad-index put still leaves company-specific risk.
With a futures or perpetual hedge, the short may need additional collateral when the portfolio rises. The gain in a separately held portfolio may not be available where the short needs it. Hyperliquid's margin documentation, for example, specifies which positions share collateral and which are isolated. Treat the actual account arrangement as part of the hedge.
When the hedge ends
A hedge placed for an earnings release needs a different review schedule from a permanent reduction in portfolio risk. As prices change, its size also changes relative to the assets it protects.
Write down the exposure being reduced, the approximate amount removed, what remains unhedged, and the event or date for reassessment. Then compare the result with the simplest alternative: holding less of the original risk. The extra complexity earns its place only if it solves a problem that the simpler adjustment does not.