Hedging the AI trade and crypto with futures
As anxiety over the AI trade increases and volatility in crypto spikes, traders who are worried about downswings can manage risk with futures.
Welcome to Sherwood’s deep dive into futures markets, presented in partnership with 
As anxiety over the AI trade increases and volatility in crypto spikes, traders who have a long-term bullish outlook on their holdings but have near-term concerns about downswings can use futures to manage risk.
Just as the origins of the futures market can be traced back to farmers who needed to hedge their crops, hedging is still an important function of the futures market for all types of participants, from airlines hedging the price of oil to retail investors looking to hedge their retirement portfolio.
Why hedge?
Hedging with futures allows traders to manage portfolio risk in the event of a downturn. As their holdings lose value, a short futures contract would gain in value, offsetting some of their losses. Because of the leverage futures offer, a relatively small initial margin requirement can hedge a large portfolio.
Long-term investors looking to protect their retirement portfolio holistically could use S&P 500 Index futures to hedge against downside risk. If, however, you’re specifically concerned about AI risk or a downturn in the Magnificent 7, given that roughly 70% of the Nasdaq 100 consists of either a Mag 7 or tech stock, selling Nasdaq 100 futures contracts could offer a broad hedge against a potential AI downswing.
Depending on the size of the position you want to hedge, a variety of contract sizes are available.
For example, if you want hedge a $50,000 position in Nasdaq 100 companies, a Micro E-mini Nasdaq 100 futures contract (/MNQ) has a $2 multiplier, meaning that if the Nasdaq 100 is trading at 25,000, the notional value of one /MNQ contract is $50,000 ($2 x 25,000).
Let’s say that the Nasdaq 100 drops 5%. Your long position is now worth $47,500. However, if you sold one /MNQ contract, the value of your short futures position would theoretically rise by the same amount, in which case you could buy back your short futures contract for a $2,500 profit.
For traders with a large concentration of crypto, cryptocurrency futures are also available for a wide variety of coins, including bitcoin, ethereum, XRP, and solana.
This summer, CME Group plans to launch Single Stock futures on more than 50 of the top US stocks, which will allow traders to further tailor their hedge for a large exposure in Nvidia, Alphabet, Meta, and more.
Risks of hedging
While hedging offers downside protection, there’s always a risk that your position will move to the upside, in which case, the loss on your short position will eat into the gains on your long position. For this reason, traders might choose to hedge only a portion of their portfolio.
Ultimately, hedging functions a lot like insurance: while you hope you never have to use it, during an unfortunate event, you’re very glad to have it.
