Looking for a Better Hedge

Mar 30, 2020

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.