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Normally the Market exposure associated with your stock/portfolio is your delta for that stock/ portfolio. Basic idea of hedging involved here is buying/selling respective futures depending upon whether you are short or long. Right now I just use one single future traded on stock exchange to hedge against all kind of exposure, whether it's a sector or country exposure.

In some cases, my future doesn't always has stock components for all sectors, like it may be missing some mining stocks. There are days when such sector can move by a large percentage. I basically want to minimize my risk for these days, for which I can manually buy the exchange traded sector specific future but then certain sectors have inter correlation with each other. So buying one may not be the best way but instead some combination of 2-3 futures which can minimize my exposure as much as possible.

Basically, what I am trying to do is select some 2-3 futures (may be ETFS) which can reduce my market exposure to as low as possible? How can I select those 2-3 ETFs/Futures from my universe of say 9-10?

The problem can be solved by either iterating over all the possible combination of futures (present in my universe) or coming up with some function for market exposure that can be minimized under certain constraint. I hope I am clear in what I am trying to accomplish or may be someone can help me to refine the problem statement, if they get the idea.

I am looking for some suggestions on how to continue or what could be a good objective function that could be minimized in this case.

Thank you.

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  • $\begingroup$ you should look at sector ETFs, which should solve your problem. $\endgroup$
    – Matt Wolf
    May 16, 2013 at 5:11
  • $\begingroup$ @Freddy We can't afford to use ETFs given the fact that we only do Day trading and ETFs aren't considered to be a good instrument for short trading horizon. $\endgroup$
    – NewAlgo
    May 16, 2013 at 8:49
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    $\begingroup$ I do not see how they are not good short term instruments. Many are traded with tight enough spreads and with deep enough liquidity to rival large cap stocks. $\endgroup$
    – Matt Wolf
    May 16, 2013 at 8:55
  • $\begingroup$ @Freddy I did some research on ETFs and find out that they can be used also. I would like to know why sector specific ETFs over futures? What I am trying to do is select some 2-3 futures (may be ETFS) which can reduce my market exposure to as low as possible? How can I select those 2-3 ETFs/Futures from my universe of say 9-10? Using brute force method by trying different possible combination is something I want to avoid. $\endgroup$
    – NewAlgo
    May 16, 2013 at 15:59
  • $\begingroup$ You should then change your question. What you actually like to ask is hardly explained in the above $\endgroup$
    – Matt Wolf
    May 16, 2013 at 16:05

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