Adrian Reid shows how mixing different trading styles and strategies across US, Australian, and Hong Kong markets cuts correlation risk. When strategies move independently or opposite each other, you get real diversification instead of everything tanking together.
A couple of different ways, different styles of systems within the portfolio helps create that diversification and remove the core or address the correlation effect. So if you've got long side systems and short side systems and you combine them together into the portfolio, yes, the holdings in the long side system are going to be correlated and they're going to tend to move up and down together. And the holdings in the short side portfolio, the same thing, but the two non correlated strategies, the equity curves of those strategies are low or negatively correlated. So it's a good addition, a good combination in the portfolio. So I, what I'm looking at is the equity curve of the strategies and I want to make each strategy have as good an equity curve as possible. But then I really want to combine multiple strategies with different equity curves so that I get the diversification benefit. The correlation of the individual stocks matters less then because it's about the strategies and how they move in and out of the market. Probably one more thing, actually. The stocks within the US stock market tend to be correlated. Stocks within the Australian stock market are correlated. Stocks within the Hong Kong stock market are correlated. And those to some extent are correlated to each other. But not, not, not always. So if, if I only traded U.S. stocks, I'd be in a much worse position than I am trading US and Australia and Hong Kong, because the US market might be going up, but Hong Kong might be going down. So there's some, also some, some built in, some good diversification you get from that, which reduces the impact of the fact that stocks are all internally correlated.
