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Looking for a better hedge

categories: Americas, Asia Pacific, Australia, EMEAI, ZHANG Howard, BONNE George, Asset Allocation and Asset Liability Management, Factor and Risk Modeling, Investing (Investment Management), Portfolio Construction and Optimization, Risk Management, Asset Managers (Quant or Fundamental), Asset Owners, Banks, Hedge Funds, Portfolio Management Analytics, Risk Management Analytics, Equities

Peer selection and understanding relationships between companies play a pivotal role in many areas of finance. Previously, we described a methodology for quantifying the similarity between every pair of companies from the text of their business descriptions in 10-K filings, fundamentals, news mentions and return correlations. We showed how the resulting similarity score matrix could be used to identify pairs or groups of similar companies (peers), which have numerous potential applications. Here we analyze ways to use this data for modeling simple hedging portfolios, minimum-volatility (min vol) portfolios and optimized hedging portfolios.

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