How do I hedge equity beta with futures?

Hedging Equity Beta with Futures

The core idea: keep your physical holdings intact, and use index futures to adjust your portfolio's net market exposure. This avoids triggering capital gains and is faster and cheaper than selling and rebuying stocks. ^[1]

Why futures instead of selling stocks?

^[10]

The Beta-Targeting Formula

To move from your current beta ($\beta_P$) to a target beta ($\beta_T$): ^[1]

$$N = \frac{(\beta_T - \beta_P) \cdot V_P}{b \cdot S_0}$$

Where:
- $N$ = number of futures contracts (negative = short, positive = long)
- $\beta_T$ = target portfolio beta
- $\beta_P$ = current portfolio beta
- $V_P$ = portfolio value (₹)
- $S_0$ = current futures price
- $b$ = notional value per contract (Nifty 50: lot size × futures price)

Worked Example

• Portfolio value: ₹1 crore
• Current beta: 0.9
• Target beta: 0.5 (you want to reduce exposure)
• Nifty futures price: 23,000 | Lot size: 50

One contract notional = 23,000 × 50 = ₹11.5 lakh

$$N = \frac{(0.5 - 0.9) \times 1{,}00{,}00{,}000}{11{,}50{,}000} \approx -3.5$$

→ Short 3–4 Nifty futures contracts. ^[1]

Key Rules

• $N < 0$ → short futures (reduce beta / hedge)
• $N > 0$ → buy futures (increase beta)
• This is a temporary, tactical overlay — not a permanent position ^[1]

Before You Do This — Check These

1. Portfolio size ≥ ₹25 lakh. Below this, one contract is too coarse to be precise. ^[1]
2. You have SEBI F&O authorization on your trading account.
3. You understand margin and mark-to-market. Futures require daily MTM settlement — a sharp market rally against a short position will demand margin calls even if your long-term thesis is correct. ^[6]
4. Roll dates matter. Near-month contracts expire monthly; you must roll the position or it closes automatically.

The Screening Question to Ask Yourself

"Am I reducing beta temporarily for a specific, time-limited reason — or am I just nervous about markets?"

If the answer is the latter, redirecting SIP contributions toward underweighted asset classes is a simpler and operationally safer tool. ^[1]

Apply this → Use the India Macro Dashboard to check current Nifty levels and business cycle context before sizing a TAA hedge.