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What are Inverse Strategies?
What are Inverse Strategies?

Learn more about how inverse strategies help short or hedge a portfolio

Richard avatar
Written by Richard
Updated over a week ago

Inverse strategies are most commonly employed by ETFs in traditional finance, which are used to track the inverse price movement of an underlying benchmark (e.g. S&P 500, Volatility Index). For example, if the underlying benchmark is the S&P 500, an Inverse S&P 500 Index will approximately increase 1% in value for every 1% decline in the S&P 500 - effectively a short position without the need to post margin collateral.

Similarly on TokenSets, Inverse Strategies track the inverse of any existing Sets. For example, the Inverse ETH 20 Day MA Crossover Set outperforms vs ETH whenever the ETH 20 Day Moving Average Crossover underperforms vs ETH. Learn more about moving averages here.

Using Inverse Strategies

Inverse Strategies are typically used by more advanced traders to speculate and hedge during times when a benchmark does not perform. If a trader believes that the market is due for a downswing, he/she will purchase an inverse index to capture value on the downside. Additionally, one could hold proportions of both a long and inverse position to hedge volatility risk, or avoid the chances of a large loss. E.g. Hold 75% of a Trend Trading Set and 25% of the Inverse in a portfolio to protect against the downside.

If utilized alone, inverse strategies rely on timing the market which typically make them shorter term holds in the weeks to month timeframes. These strategies should not be used over the long term.

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