Timing is everything...

...and so it is likely to prove in this correction. Macro Man expects the pain to last for another month, to be followed by a surprising, irritating, sideways price action that culminates in a rally. Said rally may well coincide with an improvement in the tone of economic data, which Macro Man expects to emerge in mid-April.

It therefore makes some sense, given this view, to sell longer dated puts (expiring after the expected rally commences) to finance short-ter term portfolio protection.

Although better prices could probable be achieved by waiting, Macro Man would rather hedge too early than too late.

He therefore buys 200 April 1370 SPM7 puts @ 20.5 and sells 200 June 1310 puts @ 19.50.

The net delta of the spread is currently short 10%, but will increase as/if prices fall.
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March 7, 2007 at 1:58 AM ×

Curious about DBV correlation with stocks since inception (Sep. 06) to present, regressing daily change in DBV vs. change SPY:

Regression Statistics
Multiple R 0.45
R Square 0.20
Adjusted R Square 0.19
Standard Error 0.004
Observations 112

Intercept X Variable
Coefficients 0.00018 0.315
Standard Error 0.00037 0.060
t Stat 0.48000 5.200

There has been a high correlation between DBV and SPY on a daily basis.

Macro Man
March 7, 2007 at 11:39 AM ×

Yes, this is a weell-known problem. For the last few years, the returns of many "risky" strategies have been very highly correlated: long equity beta, long EM, long credit, long FX carry, short vol.

The problem is that a "diversified" macro fund that includes specialists in all of these different disciplines can end up with a series of "diversified" strategies that are all differnt flavours of the same trade.

I think last May and last week demonstrate how correlated these "diversified" strategies can be, with painful results when it goes wrong.

I think that it's an argument in favour of generalists at the expense of specialists; a generalist looking at everything can choose to implement the best of the risky trades or strategies and ignore or short the least attractive ones.

It is much easier to hedge cross-market portfolio risk from the top down than the bottom up, as bottom up investment decisions will generally all point in the same direction, thereby accreting, rather than reducing, overall portfolio risk.