Online Portfolio Hedging with the Weak Aggregating Algorithm

Najim Al-Baghdadi, Yuri Kalnishkan, David Lindsay, Sian Lindsay

Research output: Chapter in Book/Report/Conference proceedingConference contribution


In this paper we apply the Weak Aggregating Algorithm to find optimal risk management strategies for financial Market Makers (MMs). Here risk is caused by the market exposure. It is effectively represented by the MM’s overall net position, which is the aggregation of all the buy and sell trades carried out by the MM’s clients at a given point in time. So-called hedging strategies are used by MMs to manage their risk and reduce market exposure. In essence, the MM actively places trades in order to reduce its overall net position, keeping it within some predefined bounds and as neutral (or flat) as possible. A flatter net position allows the MM to counter any unfavourable price movements which could otherwise incur a significant loss. We apply the Weak Aggregating Algorithm (WAA) to hedging strategies, which are treated as the experts. We combine their hedging decisions with the goal of reducing portfolio risk and maximising profitability, whilst also attempting to smooth out significant drawdowns. We develop a variation of the WAA using discounting and evaluate the WAA on a subset of real life client risk data in three commonly traded Foreign Exchange (FX) currency symbols: EUR/USD, EUR/GBP and GBP/USD. The results show how varying loss parameters and application of discount factors can enable the WAA to give combinations of hedging strategies that can significantly improve profitability and reduce drawdowns as compared to the benchmark of not hedging.
Original languageEnglish
Title of host publicationConformal and Probabilistic Prediction and Applications
Subtitle of host publicationCOPA 2022
Number of pages20
Publication statusPublished - Aug 2022
EventThe 11th Symposium on Conformal and Probabilistic Prediction with Applications: COPA 2022 - Brighton, United Kingdom
Duration: 24 Aug 202226 Aug 2022

Publication series

NameProceedings of Machine Learning Research


ConferenceThe 11th Symposium on Conformal and Probabilistic Prediction with Applications: COPA 2022
Country/TerritoryUnited Kingdom
Internet address


  • Prediction with Expert Advice
  • Online Learning
  • Weak Aggregating Algorithm
  • Foreign Exchange
  • Currency Trading
  • Risk Management
  • Hedging

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