The cross asset myth

Trading Long Zinc, Short Coffee or say Long Industrial Metals index and Short Carbon Emissions index could evoke a shock among the pair trading community, leave aside the simple investor. How can you mix coffee with zinc? “These are pairs, they are not for me, I am a single stock (asset) absolute performance go getter”. Wrong Answer. A simple Dow trade is an investment in the Long Dow – Short Dollar pair as Dow is denominated in dollar. It’s different that you ignore the dollar leg and just look at the Dow leg. But the real returns on your single asset trade have to be netted for dollar performance.
From July 2008 we have been tracking assets against their respective benchmarks in form of pairs. We benchmarked metals against precious metals index, various currencies against dollar, agro assets against a composite agricultural index, and energy assets vs. energy index. We illustrated numeric rankings selling the best and buying the worst, it worked.
We started running a portfolio of agro pairs, forex pairs, metal pairs, energy pairs, and bond pairs all the time realizing that we were actually trading a cross asset portfolio where metals were pegged against agro, agro against energy. It was a mix match of different assets. If we had two running pairs long AIGI (Industrial Metals) vs. short Nickel in one trade and long AIGE (Energy Index) and short heating oil (heat) on the other, we were actually playing Nickel against Energy Index.
Today we integrate our Alpha Global portfolio with the following 55 assets. Forex (EUR USD, AUD USD, GBP USD, CAD USD, JPY USD, CHF USD, Yuan Rnmbi, Indian rupee, NZD USD), Energy (Crude, Natural Gas, Gasoline, Heating Oil, Petroleum, Carbon Emissions, Brent, WTM, Energy Index), Metals (Precious Metals, Tin, Zinc, Nickel, Copper, Platinum, Silver, Industrial Metals Index, Gold), Agro (Coffee, Corn, Grains, Livestock, Sugar, Wheat, Soybeans, Cotton), Thematic and Global Equity (Coal Mining Fund, Shipping Fund, Dow Industrials, Sense, Agricultural Equity, Water, Nuclear, Russell 2000, Russell 1000 USD), Bonds (US 30, US 5Y,  US 10Y, US 2Y, INR Bond Index, China Bond Index, Australian Bond Fund, Global Bond Index, Sweden Bond Index).
Now you will see us doing seemingly exotic strategies where we unwind AIGI-Nickel pair at a profit by just closing the Nickel leg and shifting AIGI exposure against short Carbon. It just sounds strange. Markets and assets are connected in time through performance. Time does not differentiate between zinc and coffee. It’s the same inefficient divergent pairs that can be profited from. Lack of cross asset pair tradability is a myth. Get ready for long zinc, short coffee pair. We are expecting a signal on the pair soon.