Hong Kong and US stock hedging strategy: How to use highly correlated stocks to deploy long and short operations?

Hong Kong and US stock hedging strategy｜How to use highly correlated stocks to deploy long and short operations?

In the Hong Kong and US stock markets, using strongly correlated stocks for hedging deployment is actually a quite attractive investment strategy. The focus is not on which stock will rise, but on finding differences in stock price trends within the same industry, hedging market risks while earning relative returns.

How tech giants hedge:

Semiconductor sector: NVIDIA (NVDA) $NVIDIA(NVDA.US) against Intel (INTC) $Intel(INTC.US)

Speaking of AI chips, NVIDIA is undoubtedly the industry leader, benefiting from the AI boom in recent years, with its stock price soaring; in contrast, Intel has lagged due to process delays and slow AI transformation, significantly underperforming. However, both stocks are major semiconductor manufacturers, with a certain correlation in stock prices, making them a good opportunity for hedging trades. For example, you can choose to go long NVDA and short INTC. Even if the entire sector declines, NVDA may fall less due to competitive advantages or even rise faster. During the AI boom in 2023, NVDA rose over 200% in a year, while INTC only rose about 30%. If you had made long and short deployments early, the profits would be considerable. However, be aware that this sector is highly competitive, with rivals like AMD emerging and process technology breakthroughs changing the landscape, so investors need to closely follow industry developments and company fundamentals.

Electric vehicles: Tesla (TSLA) $Tesla(TSLA.US) against BYD (1211.HK) $BYD COMPANY(01211.HK)
TSLA focuses on high-end, self-owned energy solutions with brand effects; BYD relies on full industry chain cost control and rapid expansion. Although their business models differ, they are both global electric vehicle giants and can also form hedging portfolios. Investors can flexibly deploy according to market expectations, for example:
Optimistic about US electric vehicle subsidies: go long TSLA, short BYD
Optimistic about China's domestic demand growth: go long BYD, short TSLA Between 2022 and 2023, TSLA's stock price fluctuated greatly, while BYD was relatively stable, creating a lot of space for hedging portfolios. Be cautious of policy changes, solid-state battery breakthroughs, lithium price fluctuations, and other factors that directly affect profit expectations, and it is recommended to manage risks well.

Chinese e-commerce: How to deploy long and short strategies in the four-way battle?

China's four e-commerce giants: Meituan (3690.HK) $MEITUAN(03690.HK), Pinduoduo (PDD) $PDD(PDD.US), Alibaba (BABA) $Alibaba(BABA.US), JD.com (JD) $JD.com(JD.US), although they compete fiercely, their stock price trends sometimes synchronize, creating operational space for long and short hedging strategies. For example:
Optimistic about the sinking market + instant retail: go long Meituan + Pinduoduo, short Alibaba + JD.com
Optimistic about logistics + quality consumption: go long JD.com + Alibaba, short Meituan + Pinduoduo In 2023, Pinduoduo's performance exploded, significantly outperforming in stock price, and investors who made hedging deployments had good returns. But the e-commerce industry changes rapidly, with factors like live streaming, cross-border e-commerce, logistics wars, and traffic grabbing quickly affecting market dynamics, so closely monitor trend changes.

What risks should be cautious of when hedging?

Although strongly correlated hedging strategies have many benefits, they are not risk-free:

1. "Correlation collapse" in extreme market conditions: For example, in March 2020 when the pandemic broke out, all tech stocks fell together, and hedging strategies were almost ineffective.
2. Technical limitations in shorting Hong Kong stocks: Not every stock can be borrowed for shorting, and some require high interest payments.
3. Sudden news disrupts deployment: A company suddenly has good/bad news, and stock price trends may immediately decouple.
4. Macro factors also affect both long and short sides: In 2022, the Fed's interest rate hikes led to a decline in tech stocks across the board, affecting both long and short positions.
5. Trading rules may change suddenly: For example, when Hong Kong stock market conditions are abnormal, short selling may be suspended/increased thresholds, so risk control must be done well.

What should be noted in actual operations?

• Capital efficiency: Hedging strategies require opening both long and short positions simultaneously, which requires higher capital than single-sided operations, so remember to reserve enough funds to prevent liquidation.
• Different tax treatments: Hong Kong and US stock tax systems are different, and cross-border operations need to pay attention to double taxation issues, so it's best to find professional accounting/tax consultants.
• Technology-assisted risk monitoring: Use professional trading systems to track correlation changes and set up warning systems to stop losses or switch positions early.

Strongly correlated hedging is not short-term speculation, but a strategy framework for building stable and diversified risk. If used well, it can enhance risk-adjusted returns in both bull and bear markets. However, success depends on three key elements: stock selection accuracy, risk management, and information tracking.

If you are interested in these strategies, feel free to leave a comment to exchange ideas or share which combinations have worked best for you!