Tamsin Equity's book has a momentum factor exposure of 0.4. A momentum reversal of minus 15% hits the factor in a week. What does the book lose, and how would you hedge the exposure without selling your best ideas?

The factor alone costs about 6% of NAV, Rs 120 crore, and the week ends down 4.8% despite 1.2% of positive stock picking. The exposure of 0.4 times a 15% fall is the whole damage. To keep the names, short Rs 800 crore of a momentum factor swap, 0.4 times NAV, as an overlay: the factor risk goes, the ideas stay, at a cost of about 0.24% of NAV a year on an assumed fee.

Think of a restaurant that has quietly become a cricket-screening venue: its menu is fine, but its takings now depend on whether India is playing. A book can be neutral to the market and still carry a large exposure to a style, such as momentum, that moves on its own. When your best ideas have all rallied, they become the market's recent winners, and the book starts behaving like a momentum factorA portfolio that is long stocks with the strongest recent returns and short those with the weakest. When it reverses, stocks that led fall and laggards rise. portfolio. 0.4 times minus 15% is minus 6%.

Split the week's P&L into exposure times factor return plus what is left. The factor part is 0.4 x -15%, or -6.0%; everything else, +1.2%, is the stock-specific return that measures the analyst's skill. This split is what a platform's risk team runs every day, and it is why a pod can be told to cut its momentum exposure even in a week when its names outperformed their peers.

Sell the factor, not the names. Enter a swap that pays the momentum factor's return short, on a notional of 0.4 times NAV, Rs 800 crore, so the overlay loses when momentum rises and gains when it falls, cancelling the book's tilt. Many prime brokers offer factor baskets or swaps of this kind; a platform can also build a custom basket of the most crowded momentum names. After the overlay, the 15% reversal costs roughly nothing, and the 1.2% of stock picking comes through.

Assume fees and financing of 0.6% a year on the swap notional: Rs 4.8 crore, about 0.24% of NAV. You also give up whatever the momentum factor earns over time, which in normal years can be positive. And the 0.4 is an estimate: the exposure moves as prices move, so the hedge needs resizing, and a hedge of the index factor will not match the specific names that are most crowded. A strong answer adds the alternative: trim position sizes in the most momentum-heavy names while keeping the ideas, or add longs among recent laggards that the analyst likes on fundamentals.