Volatility & advanced strategies
What is a Correlation Swap and how do macro hedge funds use it to bet on index component dispersion?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
A correlation swap is an OTC derivative exchanging a fixed correlation rate for the realized average pairwise correlation among a basket's components, letting macro funds bet on whether index stocks move together or disperse.
How it works
Traders buy correlation when expecting market-wide shocks to drive co-movement, or sell it (dispersion trade) by shorting index options against long single-stock options when they expect idiosyncratic divergence.
An example
A dispersion trade shorts SPX straddles while buying straddles on top index constituents, profiting if single-stock volatility realizes higher than index volatility implies.
Risk & limitations
These are complex institutional OTC products with significant basis risk, liquidity constraints, and require active Greeks management across many underlyings simultaneously.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.