The correlation hedge is a simplified version of Keller and Butler’s EAA-formula (see paper or primer). For GPM we only use return and correlation information as momentum metric. We do so with two variations:
- GPMxM: the correlation multiplied return metric ri * ( 1 – ci )
- GPMxF: the correlation fractioned return metric ri / ( 1 + ci )
In the graph below, the two correlation hedge variations are painted.