Portfolio Hedging Framework - Causeway Capital Solutions

Executive Summary

Businesses with exposure to multiple teams or multiple locations can achieve significant cost savings by hedging at the portfolio level rather than independently hedging each risk. Our framework leverages correlation analysis to reduce aggregate hedge costs by 18-23% while maintaining equivalent protection.

This document outlines our proprietary methodology for constructing optimized hedge portfolios, applicable to restaurant groups, regional chains, and hospitality networks with multi-team sports exposure.

18-23%

Cost Reduction

0.34

Avg. Correlation

5:1

Protection Ratio

Core Concept: Diversification Benefit

Just as investment portfolios benefit from diversification, hedge portfolios can achieve cost efficiency when underlying risks are not perfectly correlated. When the Celtics miss the playoffs, it doesn't guarantee the Bruins will also miss - these outcomes have historical correlation of approximately 0.34.

The Diversification Principle

If you hedge the Celtics and Bruins independently, you pay full price for each hedge. But portfolio theory shows that the combined risk is less than the sum of individual risks when correlation is below 1.0. Our framework captures this "diversification benefit" as direct cost savings.

Correlation Matrix: Boston Teams

Team Pair	Correlation	Diversification Benefit
Celtics - Bruins	0.34	High
Celtics - Red Sox	0.18	Very High
Bruins - Red Sox	0.22	Very High
Patriots - All Others	0.08	Maximum

Framework Implementation

1

Map Revenue Exposure

Quantify revenue at risk for each team across all locations. Include direct game-day revenue, shoulder period effects, and merchandise/catering impacts.

2

Calculate Standalone Hedge Costs

Price individual hedges for each team exposure using current market probabilities. This establishes the baseline "unoptimized" cost.

3

Apply Correlation Adjustment

Using our proprietary correlation matrix, calculate the portfolio variance reduction. This determines the "diversification credit" applicable to aggregate hedge sizing.

4

Construct Optimized Portfolio

Build the hedge portfolio with reduced notional exposure, capturing cost savings while maintaining statistically equivalent protection levels.

5

Execute and Monitor

Place hedge positions across regulated prediction markets. Monitor correlation stability and rebalance if team dynamics shift materially.

Mathematical Foundation

The portfolio hedge cost is calculated using standard portfolio variance methodology, adapted for binary playoff outcomes:

Portfolio Hedge Cost Formula

H_portfolio = H_sum × √(1 - (1 - ρ_avg) × diversification_factor)

Where H_sum is the sum of individual hedge costs, ρ_avg is average pairwise correlation, and diversification_factor scales with portfolio size.

Example Calculation

Scenario	Teams	Standalone Cost	Portfolio Cost	Savings
Two-Team Hedge	Celtics + Bruins	$8,400	$6,890	18%
Three-Team Hedge	+ Red Sox	$12,100	$9,560	21%
Full Boston Portfolio	All 4 Teams	$14,800	$11,400	23%

Key Insight: Savings Scale with Complexity

The diversification benefit increases as more uncorrelated exposures are added to the portfolio. Multi-location businesses with exposure to teams in different cities can achieve even greater savings due to lower cross-city correlations.

Application Guidelines

Ideal Candidates

Restaurant groups with 3+ locations near sports venues
Regional chains spanning multiple cities (Boston, New York, Philadelphia)
Hotel portfolios with properties near multiple arenas
Catering companies serving corporate clients across team affiliations

Implementation Considerations

Minimum recommended portfolio size: 2 teams or 3 locations
Correlation assumptions validated annually against historical data
Rebalancing triggered when team dynamics shift (e.g., major trades, injuries)
Basis risk from correlation instability typically <5% of hedge value

Citation: Causeway Capital Solutions (2024). Portfolio Hedging Framework: Correlation-Adjusted Methodology for Multi-Exposure Sports Revenue Protection, Version 2.1. Proprietary methodology, all rights reserved.