1/ Short thread inspired by @10kdiver on one of the most important skills a PM can have — using un-correlated and inversely correlated bets to improve sharpe ratio.

When correlations are low and there is lots of dispersion (like now) you can hedge longs with other longs.

2/ Here’s how it works. Let’s say you like home builders right now. Notice how they don’t act well when rates are going up? And on days when your commodity stocks are ripping $LEN is not?

3/ Great demand story but the bear case on housing is rates going up and lumber prices hurting margins. Hmm? I wonder what we can do to hedge that? So you go look at lumber stocks and it turns out they look like awesome stories (ATH lumber, flat supply curve,

4/ only 4-5x EBITDA, mountains of FCF). This is a PM’s dream — you like both long bets and they happen to partially hedge each other. Lumber (and most commodity stocks) tend to do better when the economic outlook is improving and long rates are going up.

5/ Got too many mats and industrials in the book? Then find some stocks you like that will do well if growth slows and rates fall. Maybe some $PG, $CHD, $MSFT, $AMZN. Like gold stocks but worried about real rates going up? Maybe short some $TLT or if you’re crazy, some SAAS

6/ names with no profits. I’ve found you have to have two components: the narrative of the hedge has to make sense logically AND you have to observe the low or neg correlation confirming the narrative.

7/ Here’s the excellent thread by @10kdiver that inspired me to explain a practical implementation of the concept. https://twitter.com/10kdiver/status/1360610049840672774