During the start of the year I was thinking how could I bet against certain stocks (in my case mainly Tesla) without using derivatives and the risks that come with them.
After I had success betting on the oil price with a highly correlated investment fond, I came to the conclusion that negative correlations could be used to bet against the price of other assets. Unfortunately, it is not easy to find correlations between assets if you don't know which assets to compare in the first place.
So I created a website where you can find the 10 highest and 10 lowest correlations of certain assets.
- Building things like this is always great. And its a fun site to poke around on.
- I would not count on this approach or expect it to be reliable in terms of actually hedging. Correlation, as a measure, has lots of issues. You are boiling down a lot of complex relationships into a single number. While it is convenient for many calculations, there are many problems. For example, many asset classes will go through periods with positive correlation and then later, negative correlation. This is due to a factor driving both securities price becoming more or less volatile compared to the other drivers. E.g., recent increased volatility around inflation expectations driving correlations between rates and equities. Whereas, few years ago, inflation was not driving anything.
- One alterative approach is to have a "risk model". Which essentially decomposes a security into drivers. Each security then represents a basket of these drivers. You can then use this model for range of purposes. While not perfect by any means, the model contains more information than a correlation. These too have a range of issues and creation and use is as much art as science.
- In general, you won't find many negative (or even very low) correlations across individual equities. Most stocks are driven by a common set shared risk factors that drive much of the risk. But if you can find negatively correlated securities (or lowly correlated), then that is certainly helpful.