Beta hedging: performance measures, momentum weighting and rebalancing effects

Daniel Nadler and Anatoly B. Schmidt

Abstract

We discuss the various performance measures of beta hedging and offer a new synthetic criterion that accounts for both risk-adjusted returns and losses of trading strategy. We consider two long portfolios hedged by the SPDR S&P 500 exchange-traded fund (ETF), which mimics the Standard & Poor’s 500 (S&P 500) index. The first portfolio consists of nine major US equity sector SPDR ETFs, while the second portfolio contains five high-growth technology stocks. For these portfolios, beta hedging always outperforms market-neutral hedging. We found that momentum-based weighting of long assets may be preferable for portfolios with high-growth stocks and short rebalancing periods. In most cases, though, beta hedging with equal weighting of long assets performs better.