Investors sometimes ask me: Why build a diversified collection of alphas (CODA) instead of concentrating on just one or two high-conviction strategies?
It’s a fair question. You may have heard the saying:
“Concentration builds wealth, diversification preserves it.” But when it comes to quant strategies, the picture is more nuanced.
Everyday Analogy: The Man U Example
In my past workplace, almost everyone was a Manchester United fan. On match days, the office mood was tied to the team’s performance. When Man U lost, productivity the next day fell sharply. This is very much like a drawdown in a concentrated portfolio—everything hinges on one outcome.
Another example will be that If all employees were fans of the same K-pop group, then when that group visited town, everyone would want to take leave at the same time. The result? Disruption.
That’s why in a workplace, balance matters—and in investing, balance matters even more.
Diversification in Alphas
But wouldn't a workplace with similar interests be useful in building a cohesive workplace. Well, I do agree on that. At the same time, the workplace example is imperfect.
Because unlike human teams, alphas don’t need cohesion. Their “job” is not to bond with each other but to deliver returns independently. In fact, the less correlated they are, the stronger the overall portfolio becomes.
Research shows that blending uncorrelated strategies reduces overall volatility and drawdowns while preserving returns (Markowitz, 1952; Statman, 1987). A diversified alpha portfolio is designed to absorb shocks: when one strategy underperforms, others can carry the weight.
Here are more supporting Facts
A study by Statman (1987) found that the benefits of diversification extend beyond stocks to strategy combinations, improving stability without significant loss of return.
Risk parity funds (e.g., Bridgewater’s All Weather) demonstrate that diversification across uncorrelated return streams can deliver resilience across market regimes.
Academic work (Harvey & Liu, 2019) notes that thousands of published alphas exist, but only a small fraction are persistent—hence the importance of combining many rather than relying on a few.
Closing Thought
CODA is about balance. A collection of diversified alphas aims to build a resilient portfolio, one that isn’t dependent on a single “team” to win every game. In this way, investors can pursue long-term returns with a smoother ride.
Data is King, Sizing is Everything.
Sean Seah
Portfolio Manager
Swiss-Asia Financial Services
Alpha Quant Index
Disclaimer:
The views shared here are for educational purposes only and reflect my personal opinions. They should not be taken as financial, investment, or legal advice. Please do your own due diligence before making any financial decisions.
