What Is a ‘Cross-Hedge’ and Why Does It Inherently Have Higher Basis Risk?

A cross-hedge is a hedging strategy where the futures contract used is based on an asset that is different from, but highly correlated with, the asset being hedged. For example, hedging a portfolio of altcoins with a Bitcoin futures contract.

It has higher basis risk because the price movements of the two different assets are not perfectly synchronized. The lack of perfect correlation means the gain or loss on the futures contract may not perfectly offset the loss or gain on the spot position.