Beta hedging is a risk management technique in which an investor reduces or neutralises the market-directional risk (systematic risk) of a portfolio by taking an offsetting position in a market index instrument — typically index futures or ETFs — proportional to the portfolio's beta. If a portfolio of Indian stocks has a beta of 1.2 relative to Nifty 50, the investor must short Nifty 50 futures worth 1.2 times the portfolio's market value to achieve a market-neutral position. Beta hedging protects against broad market declines while preserving exposure to stock-specific alpha — the return generated by individual security selection. Portfolio managers at India's institutional funds use beta hedging during periods of heightened macro uncertainty — such as ahead of RBI policy decisions, state or general elections, or global risk-off events — to protect against index-level drawdowns while maintaining their stock selection bets.
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