Hedging Strategy Backtesting

Hedging strategy backtesting allows traders to evaluate risk-reduction techniques by simulating protective positions against adverse market movements. With Backtestra, hedging strategies can be tested to measure exposure balance, drawdown reduction, and overall portfolio stability.

What Is a Hedging Strategy?

A hedging strategy aims to reduce portfolio risk by opening positions that offset potential losses in other positions.

Hedging does not aim to maximize profits, but to control downside risk during uncertain or volatile market conditions.

Common Hedging Approaches

Long and short positions on correlated instruments
Partial hedging using inverse exposure
Dynamic hedging based on volatility or trend shifts

Why Hedging Requires Backtesting

Improperly designed hedges can increase risk instead of reducing it.

Backtesting helps traders identify:

False hedges caused by high correlation
Over-hedging that suppresses returns
Hidden exposure during market stress

How Backtestra Tests Hedging Strategies

Backtestra simulates multi-position portfolios to analyze exposure, correlation, and performance interactions.

Multiple simultaneous positions
Exposure and risk distribution analysis
Drawdown comparison with and without hedging
Performance impact across different market regimes

Hedging vs Market Neutral Strategies

Hedging strategies are not always market neutral.

True market neutrality depends on balanced exposure and correlation, not simply holding opposing positions.

Key Metrics for Hedge Backtesting

Portfolio-level drawdown
Correlation between positions
Net exposure over time
Risk-adjusted performance

Who Is Hedge Backtesting For?

Portfolio-based traders and investors
Professionals managing multi-position risk
Quantitative traders optimizing exposure balance

Hedging strategy backtesting is available in Professional and Quant plans, with advanced portfolio analytics unlocked in the Quant tier.