Hidden Correlation — Risks You Cannot See in the Allocation Table
The Hidden Correlation Engine detects when positions in different modules share the same underlying risk — same BTC exposure, same counterparty, or concentrated short volatility.
TL;DR
The Hidden Correlation Engine detects when positions in different modules share the same underlying risk — same BTC exposure, same counterparty, or concentrated short volatility.
Why This Exists
Diversification across modules does not guarantee diversification of underlying risk. A portfolio holding Nexo in two modules has counterparty concentration invisible in the allocation table. Hidden correlations caused the largest losses in 2022.
How It Works
Three checks: (1) Counterparty Match — same provider/parent entity. (2) BTC Delta Overlap — correlated BTC exposure. (3) Short Volatility Concentration — positions losing together when volatility spikes. Counterparty above 30% triggers a hard warning.
What You See in the Platform
A "Hidden Risks" panel listing detected correlations with affected positions and combined capital percentage.
Where to Go Next
Read Constraint-Based Allocation for concentration limits, or Second-Order Stress for cascade modelling.
Next up
Constraint-Based Allocation — Guardrails That Prevent Concentration
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