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Cross-Asset Strategies

Difficulty expert

Overview

Cross-asset strategies exploit relationships between different asset classes — stocks, bonds, commodities, currencies, and alternatives.

Key Cross-Asset Relationships

Relationship Typical Correlation Trading Implication
Stocks ↔ Bonds Negative (normal) Risk-on/risk-off
USD ↔ Commodities Negative Dollar pricing effect
Gold ↔ Real Rates Negative Opportunity cost
AUD/JPY ↔ Equities Positive Risk sentiment proxy
Oil ↔ CAD Positive Commodity currency
Oil ↔ Airlines Negative Cost input
Yields ↔ Banks Positive Net interest margin
VIX ↔ S&P 500 Strong Negative Fear gauge

Risk-On / Risk-Off (RORO)

Risk-On:
Long: Stocks, commodities, EM currencies, high-yield bonds
Short: USD, JPY, CHF, government bonds, gold

Risk-Off:
Long: Government bonds, USD, JPY, gold, volatility
Short: Stocks, commodities, EM currencies, high-yield bonds

Carry Trade

FX Carry

Borrow in low-yielding currency (JPY, CHF)
Invest in high-yielding currency (AUD, BRL, TRY)
Profit = Interest rate differential - Exchange rate change

where: Interest rate differential higher-yield rate minus funding rate · Exchange rate change adverse spot move in the high-yield currency over the holding period. does: harvests the rate spread when FX stays stable. Documented historical risk premium across G10 and EM, but crowded positioning produces sharp drawdowns during risk-off episodes — size by carry-to-vol ratio and hedge tail with options when feasible.

Commodity Carry

Long: High backwardation commodities (roll yield positive)
Short: High contango commodities (roll yield negative)

Relative Value

Commodity Curve Trades

Bull spread: Long near month, short far month (backwardation)
Bear spread: Short near month, long far month (contango)

Practical Guidelines

  1. Understand Correlations — They change in crises
  2. Diversify — Cross-asset provides true diversification
  3. Currency Risk — Don't ignore FX impact
  4. Liquidity — Some cross-asset trades are illiquid
  5. Costs — Multiple legs = multiple costs
  6. Hedging — Use cross-asset to hedge, not just speculate
  7. Data Quality — Need reliable data across asset classes

Next Steps