So lets say I think inflation is going to continue to go down and return to 2% by 2023. At the same time my shares of SPY and QQQ are continuing to go down due to increasing rates.
Is the point of this platform to serve as a hedge against other asset classes or is this supposed to be thought of as a completely separate asset class and not as a hedge against other investments?
I see the gambling aspect of it of just betting on outcomes, and that is interesting to me; however, I am curious how your team thinks about it.
It is a separate asset class yes. But it ties to other markets in a number of ways.
In your example, there's two things you could do depending on your usecase:
1) You think inflation will go up and capitalize on it. Today, you might think that a good way to do that is to short SPY. That's good, not great - because it's a proxy: inflation could still go up, and you SPY could go up as well (correlation is not 1:1 for a number of reasons).
The best way to express that view is by buying inflation event contracts: more direct, no basis risk, cleaner.
This use-case was super common when I was at Goldman and Citadel, which is where we got the idea.
2) You hold SPY but worry about the exposure of your holdings to inflation: you can use event contracts to hedge that exposure very precisely... think of it as a precise, meticulous surgery on your portfolio to eliminate (or even take) risks that are very difficult to eliminate with traditional instruments.
Yeah that is exactly what I want. I bought SPXS a few months ago and took a bath on it because irrational markets longer than i can stay solvent blah blah. Will take a look into this more thanks!
One other question, how did Citadel and Goldman do this before your platform existed? Were they big enough to just call up some bank and create a specialized product for them?
Is the point of this platform to serve as a hedge against other asset classes or is this supposed to be thought of as a completely separate asset class and not as a hedge against other investments?
I see the gambling aspect of it of just betting on outcomes, and that is interesting to me; however, I am curious how your team thinks about it.