Quantifying diversification in trend following portfolios of traditional and alternative markets
“Diversification is the only free lunch”, Harry Markowitz
It is well known that diversification is a very important feature of a successful trend following strategy; so important in fact that many managers include the term “Diversified” in their flagship strategies’ names. In this piece we examine why we believe having good diversification is so critical to the success of a trend following strategy and explain in detail how portfolios can be constructed to exploit diversification between markets. We then examine how to quantify diversification and whether available diversification has changed over time. We provide evidence that it hasn’t changed: the strategy has not been suffering from reduced diversification in its opportunities. Finally, we examine portfolios of ‘alternative markets’, demonstrating their significantly superior diversification.
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