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Below is just a part of what Larry had to say about building portfolios of quantified trading strategies compared to the common practice of building portfolios of stocks.
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There are two ways to build a portfolio. The most common way this is done is by building a portfolio of stocks.
If you take a look at the majority of mutual funds out there, this is the way things are done. If you take a look at what they are doing, they are building portfolios of stocks.
It’s commonly done. And it often leads to average returns. You only have to take a look at what the average mutual fund or the average money manager has done over the past decade.
Picking a portfolio of stocks historically leads to average returns.
There’s a better way to build your portfolio. And this is by building a portfolio of strategies. This means taking multiple strategies and then letting those strategies work in different market environments.
This is done by the best people in the business. It is often done by the largest hedge funds. And when you take a look at some of the names who have done this on a quantified basis, you see a James Simons, for example, at Renaissance Technologies, who is a multi-billionaire who has been on the billionaire’s list for a number of years.
You take a look at individuals like David Shaw at D.E. Shaw & Co. Again, they’ve taken a quantified approach and they use multiple strategies, in some cases hundreds or even thousands of strategies. And this approach often leads to superior returns.
So you can go out there and do what is commonly done. You can go out there and pick stocks. That’s what most people do, that’s what most fund managers do.
Or you can go and build a portfolio of strategies, and that’s what’s done by the best and what often leads to superior returns.
By trading a portfolio of diversified strategies you can often lower the volatility of your (trading) account and you can also potentially increase your returns.
Larry Connors is founder of TradingMarkets and Connors Research