Systematic Portfolios: Diversification That Actually Works
Ten strategies deployed in parallel constitute diversification only if they fail to lose capital in the same week.
Correlation Hiding in Plain Sight
A portfolio of systematic strategies can appear diversified on paper, spanning different asset classes and time horizons, while sharing a hidden dependency on the same underlying market condition, such as trending volatility or ample liquidity. When that condition reverses, strategies that appeared uncorrelated in backtesting move together in live trading, precisely when diversification is needed most.
“Strategies that appeared uncorrelated in backtesting move together in live trading, precisely when diversification is needed most.”
What Independence Actually Requires
Genuine independence requires testing strategies against each other under stressed as well as historical market conditions, and examining the underlying signal logic directly, independent of a correlation coefficient calculated over a period that may not include the regime that ultimately breaks the portfolio.
Sizing Positions by Risk Contribution
Position sizing compounds the exposure when set by conviction alone, disconnected from risk contribution: a strategy sized aggressively because it has performed well recently often proves to be the strategy most correlated with the others in the portfolio, concentrating precisely the risk the allocation was intended to spread.
- Test strategy correlation under stressed market conditions, extending beyond the historical backtest period
- Examine the underlying signal logic directly, alongside the calculated correlation coefficient
- Size positions by risk contribution to the portfolio
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Questions Before Licensing Systematic Trading Technology
The consequential questions concern system behavior under stress, not the marketing claims made about it.
Backtesting Discipline: The Easiest Number to Fake
The determining question is when the strategy logic was fixed relative to the performance period being shown.
Algorithmic Trading Compliance Amid Shifting Markets
A compliance framework calibrated to the prior market cycle governs a market structure that has already moved on.