How do I handle correlated markets and avoid double-counting the same thesis?

Correlated markets move together because they share drivers (e.g., economic data affecting both rates and elections). If you hold multiple correlated positions, you may be taking much more risk than you realize.

Detailed Explanation

1. Shared drivers: Many markets are influenced by the same underlying factors—macro data, policy decisions, legal rulings, or public sentiment.
2. Hidden concentration: Holding "Yes" on three different markets that all depend on the same outcome is effectively one large bet, not diversification.
3. Correlation spikes in stress: Markets that seem uncorrelated in calm periods can move together sharply when the shared driver is triggered.
4. Risk management: Treating correlated positions as independent leads to underestimating drawdown risk.

Common Scenarios

• You hold rate-cut markets and election markets that both depend on inflation data
• You have positions in multiple tech approval markets that share the same regulatory body
• You're long several candidates in the same party's primary (they're negatively correlated with each other, but positively correlated with party success)
• You have overlapping positions on economic data releases (GDP, jobs, CPI) that share macro sensitivity

Exceptions & Edge Cases

• If markets are truly independent (different drivers, different timelines), then holding both is genuine diversification.
• If you're intentionally building a correlated portfolio (e.g., a macro bet), then size accordingly and accept the concentration.
• If one market is much more liquid, then prefer it over the illiquid correlated alternative.

Practical Examples

You hold three positions: (1) Fed cuts in March, (2) Inflation below 3% by Q2, (3) S&P hits new high by June.

• All three are driven by the same macro thesis: inflation cools, Fed eases, risk assets rally
• A single hot CPI print could hurt all three positions simultaneously
• Treat this as one "soft landing" bet and size total exposure accordingly

Actionable Takeaways

• ✅ Group positions by underlying driver (macro, policy, legal, etc.)
• ✅ Set a total risk cap per driver, not per market
• ✅ Prefer the contract with best liquidity + clearest settlement
• ✅ Use scenario thinking: "What single news item hurts all these?"