What is hedging duration?

Hedging duration refers to the strategy employed by investors and financial institutions to mitigate the risk of interest rate movements impacting their investments or liabilities over a specific time frame. It involves managing the sensitivity of an investment portfolio or liability to changes in interest rates.

Should you hedge your duration risk?

There is a better way to hedge your duration risk. Duration hedging basically involves shorting treasury bonds or using futures — options and other derivatives to target a much lower duration than what the portfolio actually has. The downside to this is that your yield from the hedged portfolio will be slightly less, thanks to the costs of hedging.

What are some examples of duration hedging?

A prime example for duration hedging is the Sit Rising Rate ETF ( RISE ). RISE holds a portfolio consisting of futures on five and ten-year U.S. Treasury securities. The portfolio of contracts is weighted to achieve a targeted negative ten year average effective portfolio duration.