CTA · Core
CTA Correlation-Adjusted Sizing
Shrink size when markets are moving together so that ‘20 commodities’ are not one energy-risk factor wearing 20 tickers.
Definition
Estimate a correlation or covariance matrix (often blocked by sector). Allocate risk with a risk-parity or minimum-variance flavor, then apply the signal. In a crisis, correlations jump and the model cuts the whole risk-on or risk-off cluster.
Why it matters
Naive equal-vol across 80 markets overweight the correlated commodity complex. This is the grown-up fix.
Case
March 2020: correlations → 1, the model de-risks just as trends appear. Safer, and sometimes late on crisis alpha.
How to read it
Block structure (sector vs full matrix) and update speed. A 3-year correlation into a 3-week crisis is a stale map.
No query has been run yet. Which is tragically normal for most knowledge systems, but we are trying to evolve past decorative databases.