What causes hedge mismatch in a market-neutral trade?

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Hedge mismatch happens when the offsetting leg neutralizes a different risk than the one driving the main trade. The mismatch can come from the wrong instrument, unstable beta, calendar differences, liquidity gaps, or nonlinear payout shapes that do not line up the way the hedge logic assumed. The basic problem: A hedge is a mapping from one exposure to another. Mismatch appears when that mapping is weaker, narrower, or more unstable than you thought. The trade can still look balanced in notional terms while the real driver of PnL remains mostly unhedged. Common sources of mismatch: Some mismatches are obvious, like hedging an alt-specific catalyst with broad BTC exposure. Others are subtler, like using a linear perp to hedge a threshold event contract whose sensitivity changes as expiry approaches. How it shows up in the data: Mismatch often looks like residual drift during benchmark moves, one leg carrying almost all of the drawdown, or a hedge that seems helpful in quiet periods but fails exactly when volatility and urgency rise. What to do once you see it: The fix is not always a more complicated hedge. Sometimes the right answer is a narrower objective, a different instrument, a smaller position, or dropping the hedge entirely if it adds turnover without removing the right risk.