Hyperliquid (HYPE)

"HYPE will go up" Most traders on CT have the same conviction structure: "I think A outperforms B." But almost nobody actually trades it that way. They take the naked long on A, eat 104% annualized vol, get stopped out on a wick that had nothing to do with their thesis, and blame timing or excess leverage (the leverage part might be true). The structure of their bet was their problem. The value add from pair trading has become increasingly obvious to me over the last few months as crypto has traded lower. For fun, I've spent the last few days building out the case for pair trading in crypto, using HYPE/SOL as the case study because it's a trade half of CT has had on in some form over the past year. The results honestly surprised me. Same thesis, same conviction, just adding a short leg on SOL against the HYPE long, and the Sharpe goes from 0.35 to 1.45, and your trade is ATH right now while $HYPE is down ~40% off its ATH. The pair is sitting at its all-time high today. Neither HYPE nor SOL are. If you were right about @HyperliquidX being a fundamentally better bet than Solana, the pair captured that and only that. It didn't care whether BTC was at 60k or 120k. I have changed my view on portfolio positioning over the last few months given the bear market and the inability to "hide" from drawdowns in naked single asset positions. I was frustrated that I could be right on my thesis but get absolutely worked over by the market. And this is largely why I have been pair trading more. A pair trader can profit even during severe drawdown because the relative thesis (HYPE outperforms SOL) holds regardless of market direction. Over the course of almost a year, the HYPE/ SOL pair delivered a Sharpe ratio of 1.45, institutional quality, while cutting max drawdown from -64% to -45% and volatility by 21%. The directional trader with the correct fundamental view earned a Sharpe of 0.35. The pair trader earned 4x better risk-adjusted returns by adding a single short leg. For those with this position, the thesis never changed and you were right and mitigated vol. Pair trading isolates the alpha you actually have (or the alpha you think you have) and discards the market noise you don't want. As crypto matures, garbage assets go to zero and high-quality operators build trillion-dollar businesses. In that world, pair trading becomes even more obvious and advantageous. You can place these trades on your preferred perp dex or use an onchain OEMS. However, with basket trading, an OEMS helps out a lot. In a forthcoming companion piece, we extend this framework to multi-asset baskets, demonstrating that the same variance cancellation principles can compound with additional legs, reducing volatility from 104% (naked) to 82% (pair) to 57% (basket), with a Sharpe of 1.80.

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