When you try to hedge one asset class exposure with another, you are definitely running a risk of correlations breaking down and volatility profiles changing.
I prefer to focus on large-scale moves rather than on daily volatility and make sure that if my trade has several legs, I like each of them individually.
Having said that, there is no recipe against incurring a loss if the assets classes do not interact with each other the way you expected.
CIO, HonTe Investments. Ran global macro at JPM. Yahoo! Finance Contributor. Ph.D. in Mathematics. Author, The Next Perfect Trade. No investment advice.
