Beta hedging
This page shows the construction of a beta hedge for strategies built on the SigTech platform. A beta hedge serves to offset the volatility associated with trading a financial instrument or portfolio.
Environment
Begin by setting up your environment:
Learn more: Setting up your environment
Simple example
Rolling beta
The following example demonstrates how to use a rolling ES SP500 futures strategy as a beta hedge for a rolling NQ Nasdaq futures strategy.
Start by importing ES and NQ default rolling futures strategies, and then build them:
Use the rolling_beta
method from the SigTech signal_library
to compute the rolling beta of nq_rfs
to es_rfs
. The rolling window
is set to 60
days:
As expected, the beta of NQ
to ES
is mostly above 1. This is due to the higher level of volatility generally associated with NQ
.
Hedging with the signal strategy
Once the rolling beta exposure is computed, create a signal that assigns 1.0
to the strategy to be hedged, nq_rfs
, and − beta
to the hedging instrument, es_rfs
.
Combine this signal with the SignalStrategy
building block to create a beta hedged version of a strategy:
Impact of the beta estimation window
To examine the impact of the rebalancing frequency on the hedged strategy:
Realised beta
The following code block measures the impact of the realised beta on the hedged strategy. As expected, more frequent rebalancing tends to decrease the magnitude of the realised beta:
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