The risk that arises in case of hedging an asset with another using futures while the two are not identical (cross hedging). In other words, it is the risk that the spot price of the asset (or portfolio/ financial instrument) whose futures contract is being used for cross hedging and the spot price of the asset in question do not move hand in hand. The difference between the spot asset and the asset underlying the futures contract means that this risk will not be entirely mitigated at delivery.

For example, gold and platinum are similar but not identical, and hence hedging an investment in platinum with a gold futures contract would result in the risk that the historical price patterns may not happen again (irrespective of the high correlation between the two metals historically).