Correlation Between ProShares Hedge and First Trust

Can any of the company-specific risk be diversified away by investing in both ProShares Hedge and First Trust at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining ProShares Hedge and First Trust into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between ProShares Hedge Replication and First Trust LongShort, you can compare the effects of market volatilities on ProShares Hedge and First Trust and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in ProShares Hedge with a short position of First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of ProShares Hedge and First Trust.

Diversification Opportunities for ProShares Hedge and First Trust

0.92

Correlation Coefficient

ProShares Hedge  First Trust

Almost no diversification

The 3 months correlation between ProShares and First is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding ProShares Hedge Replication and First Trust LongShort in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust LongShort and ProShares Hedge is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on ProShares Hedge Replication are associated (or correlated) with First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust LongShort has no effect on the direction of ProShares Hedge i.e., ProShares Hedge and First Trust go up and down completely randomly.

Pair Corralation between ProShares Hedge and First Trust

Considering the 90-day investment horizon ProShares Hedge is expected to generate 5.27 times less return on investment than First Trust. But when comparing it to its historical volatility, ProShares Hedge Replication is 2.33 times less risky than First Trust. It trades about 0.13 of its potential returns per unit of risk. First Trust LongShort is currently generating about 0.3 of returns per unit of risk over similar time horizon. If you would invest  6,537  in First Trust LongShort on September 17, 2024 and sell it today you would earn a total of  153.00  from holding First Trust LongShort or generate 2.34% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

ProShares Hedge Replication  vs.  First Trust LongShort

ProShares Hedge Repl

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in ProShares Hedge Replication are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable fundamental indicators, ProShares Hedge is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

First Trust LongShort

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust LongShort are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile essential indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with ProShares Hedge and First Trust

The main advantage of trading using opposite ProShares Hedge and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ProShares Hedge position performs unexpectedly, First Trust can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in First Trust will offset losses from the drop in First Trust's long position.

The idea behind ProShares Hedge Replication and First Trust LongShort pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.