Beta management with index futures
Portfolio beta changes without selling stocks: contracts = (β_target − β_current) × portfolio value ÷ notional per contract. Target below current → short futures; above → long. The advantages: single-trade execution, low transaction costs, no realization of gains in the equity book. The costs: margin, basis and roll risk. For structural changes futures are a bridge — move beta first, migrate to physical equities gradually (the standard transition pattern).
Return reconstruction and liquidity discipline
TRS delivers an index's total return without delivery — the standard tool for fast access to hard markets or long/short implementation. Options reshape the distribution: index puts cap the downside (portfolio insurance); covered calls improve sideways markets at the cost of capped upside. The governance rule: every hedge must have a margin, liquidity and rebalancing plan, and its effect must appear in the portfolio's stress tests — a hedge that triggers margin calls without a budget is itself a liquidity risk.
Worked example: cutting beta from 1.2 to 0.8
- Portfolio 50m at beta 1.2; index futures notional 250,000.
- N* = (0.8 − 1.2) × 50M ÷ 250K = −80 → short 80 contracts.
- Market falls 10%: book loses ≈ −6M; futures gain ≈ 80 × 250K × 10% = +2M → net −4M = beta 0.8 ✓.
- Initial margin at 5%: 1M cash locked; a further 2% adverse move ≈ 400K call.
نتیجه: Beta hedging works — and consumes capital: margin budget and basis risk are part of the cost of risk reduction, not an implementation detail.