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28 September 2018

At Winton, our strategies seek to benefit from diversification by using multiple signals to invest systematically across almost 100 markets around the world.

The importance of diversification in investment management is intuitive enough – placing all hope in a single investment is foolhardy given the decidedly uncertain nature of financial markets. Yet diversification is particularly important for Winton’s systematic approach to investing for two main reasons.

First, our investment signals often only have a slight edge, given the difficulty of beating financial markets. This means that when a signal is applied to a single market, the results can be highly variable. This variability reduces, however, as we increase the number of times we employ our edge – whether by adding new signals, increasing the number of markets we trade, or taking a longer investment horizon.

Second, the positions our strategies take are, for the most part, directional and unhedged. Thankfully, different signals and markets tend to be profitable at different times. And this differentiation enables us to reduce the risk of a given position by diversifying our portfolios across multiple signals and many markets.

The less the correlation between those signals and markets, the greater the diversification benefits on offer. If positions do not move together, their fluctuations are bound at times to offset one another. This will reduce overall portfolio volatility while providing the same level of return.

Exploring Portfolio Diversification

This simulation, which is taken from our interactive tool, demonstrates the power of diversification. It assumes 10 strategies, each with a Sharpe ratio of 0.3 – a level that represents only a slight edge – a correlation of 0.05 and an annualised volatility of 10%. The aggregate return profile of these 10 simulated strategies is extremely positive over the long term, despite one of the strategies finishing up in the red.

These results are simulated and do not represent actual trading; the disclaimers at the bottom of this page should be read carefully when reviewing this data; no representation is being made that any account will or is likely to achieve profits or losses similar to those being shown.

These themes, including the effect that the number of signals or strategies, time horizon and correlation have on portfolio returns, can be explored further with the Future Tool.

There is, however, a tendency for market behaviour to change suddenly and to create correlations where none previously existed. We manage this risk by taking additional measures, such as by conducting proprietary stress tests on our portfolios and limiting our use of leverage.

Are Winton’s strategies a good portfolio diversifier?

As well as playing a central role within Winton’s strategies, diversification is often a driver of an investor’s decision to allocate to Winton. This is because our systematic approach to investment management tends to result in long-term returns that diverge from those of equities and bonds, making it a valuable addition to a typical equity-bond portfolio.

When considering adding Winton’s strategies to a portfolio, it is also important to understand the limits of diversification. Diversifying a portfolio is not the same as hedging it. And while it is true that the long-term correlation between our strategy and equity and bond markets is effectively zero, its directional nature means that it will often move in tandem with traditional investments for months at a time, if not years. This makes our strategies inappropriate for investors seeking explicit portfolio protection against market crashes.

Diversification is a “free lunch” that investment managers and investors alike can feast upon. Winton’s systematic approach gives us the ability to apply a wide range of investment signals and be fully invested across almost 100 global markets, around the clock. It is an approach that gives our investors’ portfolios every chance of putting on a few pounds.

Winton Absolute Return Futures Fund

This webpage contains simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity and cannot completely account for the impact of financial risk in actual trading. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any investment will or is likely to achieve profits or losses similar to those being shown.