The Best Way to Use Stock Market Correlations

When Alfred Winslow Jones pioneered the world’s first “hedged” fund (the “d” was dropped later) he blew other investors away by borrowing funds to short 20% of the stocks trading at the time. He believed that there was a connection between why some stocks go up while others go down. Today this principle is commonplace amongst all traders, it’s called hedging. Hedging a portfolio protects investors from cyclical shifts in industry, sector disruption, and other market risks. Alfred was right, after all, fundamental sector relationships translate across asset pricing. These relationships are best exemplified in the close correlation of specific…...