Ten Strategies Aren’t Diversification

Running ten strategies doesn’t give you a diversified portfolio. If all ten respond to the same market regime, you’re not holding ten strategies — you’re holding one, ten times over. Diversification isn’t about how many strategies you run. It’s about how they’re structured.

Correlation Is the Number That Actually Matters

Correlation measures how closely two strategies move together. It runs from -1 (they move in perfect opposition) to +1 (they move in lockstep).

At 0.9, two strategies move almost as one. The diversification benefit is negligible.

At 0.5, they’re partly independent — they respond differently, but they’re far from decoupled.

At 0.05, they’re effectively uncorrelated. This is where real diversification starts to work for you.

In a professional multi-strategy book, the goal is an average pairwise correlation below 0.2. Anything higher, and you’re just paying to run the same bet under different names.

The Difference Between Looking Diversified and Being Diversified

Trend-following on equity indices and trend-following on sector ETFs look like two separate strategies. Put them under real market stress and they move together.

They’re driven by the same macro factors. They tap the same return source. They break in the same regime.

Real diversification comes from somewhere else entirely — different asset classes (equities, bonds, commodities, FX), different time horizons, and genuinely different sources of return.

Why Correlation Models Have to Run in Real Time

Correlation isn’t a fixed number. It moves as market regimes shift. A pair that looks independent in calm markets can converge sharply when volatility hits. That’s why correlation can’t be treated as a one-time calculation — it has to be measured continuously by **real-time portfolio infrastructure**, with strategy weights adjusting to how the book actually behaves right now.

The Bottom Line

What you want is a portfolio with a different set of workhorses for every market regime — and no single regime that takes all of them down at once. That’s what disciplined algorithmic trading infrastructure is built to deliver.

NARRUX Systems — narruxsystems.com

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