How to Hedge Your Portfolio in DeFi
Protect your gains without selling your positions
A Short token gains when the underlying falls, which offsets a position you would rather not sell. Sizing is the whole game, and the short leg is not free to hold.
Step by step
Work out what you're actually exposed to
Add up the positions that would hurt if the market turned. SOL, ETH, a brokerage account full of stocks. All of it carries directional risk you can offset here.
Start with the biggest line. Hedging a 3% allocation is mostly ceremony.
Mint the pair for what you're hedging
Deposit stablecoins and mint L/S for the asset. Broad equity risk maps to SPY. Single-name risk needs the single-name synthetic.
SPY covers market risk, not company risk. If your problem is one earnings report, hedge that ticker.
Keep the short leg, sell the long
Sell the L token for USDC. What's left gains as the underlying drops.
Proceeds from the long leg cover most of the hedge up front.
Size it
Match the Short token's value to the slice of exposure you want covered. Half the notional covers half the drawdown, and gives up half the rally.
A full hedge is a flat position with extra steps. Most people run 25-50%.
Check it periodically
The hedge ratio drifts as prices move. Rebalance by minting more or trimming what you hold.
Weekly is enough for most books. Daily is overkill unless you're levered.
What can go wrong
- If the asset rallies you pay for the hedge in forgone upside. That's the trade.
- The short leg carries a volatility decay. Its NAV is marked down as realized volatility accrues, so a hedge held through a choppy market bleeds even when the price ends where it started.
- The synthetic tracks an oracle, not your exact holding. Hedge a portfolio with SPY and you're left holding whatever doesn't look like SPY.
- Every rebalance costs spread.