Risk
Basis risk
The risk that a hedge and the thing it hedges stop moving together.
How it works
If you hedge a portfolio of individual shares with an index future, you are protected only to the extent your holdings behave like the index. When they diverge, the hedge fails partially.
Basis risk is why hedges that looked robust in normal conditions can perform poorly in the disorderly markets they were bought for.
Related terms
- HedgingTaking an offsetting position to reduce a specific risk you do not want.
- CorrelationA measure from −1 to +1 of how closely two investments move together.
- Futures contractA standardised, exchange-traded agreement to buy or sell something at a set price on a future date.
- Tracking errorHow much a portfolio’s returns deviate from its benchmark, measured as the volatility of the difference.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.