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I have a long only global equity portfolio hedged a by shorting an equity future. Say my portfolio is long USD100m equities and therefore I short USD100m of MSCI World future (assumed Beta of approximately 1 since the portfolio is unleveraged and has no cash).

Say the portfolio is underweight US and underweight Tech. The tracking error of the portfolio, based on a risk model (say Bloomberg Port) is 5%.

I would like to know how much could be my PnL in a stressed scenario. I could run classic historical stresses (2008 GFC, Asian crisis, ...) but am particularly worried of situations where I'd lose money both on the long equities, and on the short future (ie both move against me).

How would you run this stress test?

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  • $\begingroup$ Sorry, I'm not sure I understand the question. if your long portfolio is underwiehgt something compared to the hedge, and overweight something else, say EM mining. A stress scemario might be - US & Tech rally, EM mining crashes. Are you looking for a way to identify plausible market scenarios where you lose money? $\endgroup$ – Dimitri Vulis Dec 8 '20 at 4:13

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