Neutral Hedge Strategy

1. What is Neutral Hedge Strategy?

1.1 Definition

The strategy takes a long and short position in an asset pair simultaneously to minimize the effect on your portfolio when the asset’s price fluctuates.

1.2 Mechanism

Neutral Hedge Strategy position setup procedures:

Begin by depositing a total of $400 USDC into the following positions:

• Deposit $100 USDC in Position: 3X ETH/USDC (borrowing USDC)

You have deposited $100 equivalent USDC and borrowed $200 USDC. The total position value is $300 USDC. Since it is a 50%-50% position setting, you will have a $300 - $150 = $150 cost ETH LONG exposure.

• Deposit $300 USDC in Position: 3X ETH/USDC (borrowing ETH)

You have deposited $300 USDC and borrowed $600 equivalent ETH. The total position value is $900 USDC. Since it is a 50%-50% position setting, you will have a $600 - $450 = $150 cost ETH SHORT exposure.

Both the long position and short exposures are hedged.

2. How does Neutral Strategy perform during market volatility?

Let’s simulate the price fluctuations in the simulator below:

In the graph above, the horizontal axis shows the price movement of ETH and the vertical axis shows the profit/loss (%) of the position.

When the price change against the current ETH price is between -35% ~ 50%, your profit is positive. You would receive the maximum profit when the price of ETH returns to the price it was at when you deposited. For example, in a 30-day period, you can gain ∼7% if the price of ETH is close to the price when you deposited.

Moreover, the longer your money is deposited, the wider the margin of safety is (with positive earnings). You can input experimental numbers into the simulator to have a better understanding of profit dynamics.

3. When shall I open a Neutral Strategy Position?

When you believe the assets in the pair will neither rise nor drop dramatically in the coming period.

4. What is the risk of a Neutral Strategy?

There is a 10% maximum drawdown when you open a Neutral Strategy position on Francium.

Details:

According to Question 2's illustration, if the price of ETH varies sharply (for example, rises > 60% or drops > 50%) ,your position will be at a loss.

Your position will be closed at the maximum 10 % drawdown of the total position value to avoid further loss.

The 10% drawdown only applies to the market-neutral strategy, not positions where you manually selected the amount of leverage.

5. Will my position in Neutral Strategy be liquidated?

Liquidations are not triggered on this strategy. By design, the Neutral Strategy's default maximum drawdown amount is 10% for your strategy position. Total liquidation of a position, which is possible with Leveraged Yield Farming, is avoided in the Neutral Strategy.

6. Should I consider the Neutral Strategy?

🙆 If you are risk-averse but still want to participate in farming, this strategy may be considered.

🙅 If token prices increase significantly over the next few months, the Neutral Strategy may not increase in value as much as Leveraged Yield Farming.