How to balance and diversify strategies

A majority of BTC, followed by ETH, and then some up-and-coming altcoins… Most crypto traders own several crypto-assets, but they don’t always consider diversifying their strategies in quite the same way. HAL helps you balance your investment between several strategies to improve performance and diversify risk. Keep reading to see how!

What’s Diversification?

“Don’t put all your eggs in one basket.” You might have heard this saying before – and it applies to finance and trading as well. Diversification is an investment strategy that consists in owning different types of assets and operating multiple strategies at the same time. This technique is used by hedge funds to theoretically minimize risk. The logic behind this is that by combining strategies you can reduce long-term volatility and increase return.

Picture a trader investing in multiple types of strategies. They could benefit from different market cycles (bull and bear trends), while being less exposed to specific risks (as opposed to dedicating all their funds to a single asset) and market contexts (only betting on bull or bear markets).

Building a strategy portfolio on HAL

In order to diversify, you need to pick cryptos and strategies that are truly different – otherwise you are only duplicating trades. HAL currently offers 15 strategies, divided into 4 categories. Let’s break them down to see if they are truly unique.

  • Wise strategies are trend-following strategies trading on a single underlying (for example: BTC, BNB, ADA, MATIC, SOL…) or the ETH/BTC pair. They are long-only (never short-sell) and designed to benefit from market upsides while going neutral during downtrends.
  • Pulse strategies are aggressive strategies trading on BTC, ETH, or the ETH/BTC pair. They can go both long and short, which allows them to be always active in the market.
  • Artificial Intelligence (AI) Pick selects the top 3 ETH or BTC performers for the next 24 hours thanks to… you guessed it, artificial intelligence. Its aggressivity, frequency, and typology of trade can therefore change every day.
  • Dynamic combines 13 strategies trading on ETH, BTC, BNB and ADA to trigger both long and short positions. On top of this, it features a risk-control mechanism, aiming to cap volatility as 50%.

HAL strategies cover a lot of ground, and even this quick overview shows they are not redundant. Some are designed to thrive in bull markets with clear trends, while others bet on volatility. They offer a wide range of frequencies, signals, and risk levels.

Diversification on HAL: What Does It Look Like?

Let’s have a look at a concrete example of what diversification can look like on HAL, combining two Wise strategies on different coins.

1/2 Wise ETH + 1/2 Wise BNB - YTD Performance

The graph above tracks performance for a portfolio composed of two Wise strategies on different coins. 

50% of funds have been allocated to Wise: ETH, and 50% to Wise: BNB.

Both Wise strategies outperform their underlying asset, and it looks like the diversified portfolio stands between Wise: ETH and Wise: BNB in terms of results.

1/2 Wise ETH + 1/2 Wise BNB - YTD Performance - KPIs Table

Diving deeper into the data, it becomes clear that the diversified portfolio fared better than Wise: ETH, while exhibiting lower volatility and draw downs than both strategies. It was therefore efficient in mitigating risk.

Correlation between Strategies

We’ve seen a possible benefit from diversifying strategies on HAL with two Wise trading on different coins. Now, let’s look at the bigger picture, with the correlation between all our strategies.

Correlation in trading, which measures the relationship between two datasets, is an important variable. How your positions move in relation to other positions is crucial to understanding and managing your trading risks.

The strategies should not produce negative results at the same time or during the same time frame, but rather make profits and losses independently from one another. This is one of the most important aspects of trading, but also one of the most difficult.

To help you identify this variable we have calculated the correlations between our strategies, based on the returns since 01/01/2022.

Correlation between HAL Strategies

So how can you make use of this data?

The closer the value is to 1 (purple), the higher the correlation between the two strategies. 

Conversely, the strategies become increasingly decorrelated when the value is low, sometimes even turning negative – the cell then tends towards white.

By choosing to combine two (or more) strategies with low correlation, you increase your chances of diversifying your risk on HAL. 

Conclusion: What If Diversifying Was Dead Simple?

After reviewing real-world data, we have seen that the case for diversification holds, especially in the long-term. By diversifying strategies along with coins, traders can reduce some volatility and risk, while staying active on markets – mixing strategies typologies allows for greater agility in fast-changing market conditions.

And thanks to HAL, selecting strategies doesn’t have to give you a headache. It only takes three steps to start trading on HAL with as many strategies as you like, building a strategy portfolio in minutes. Once you have signed up, connected to your exchange, and made your selection, all that’s left to do is monitor your strategies’ results.

Learn more about our strategies

Disclaimer:

Investing involves risk, including the possible loss of all the money you invest. In particular, crypto-assets are a highly volatile and speculative asset class. HAL is only suitable for traders who are willing to bear the risk of loss and experience sharp drawdowns. Past performance is not necessarily a guide to future performance. The performances presented are real performances calculated net of execution fees and slippage from a proprietary Binance account.

The purpose of this material is to provide objective, educational and interesting commentary and analysis on developments in the crypto-assets sector. Nothing in this material should be interpreted as constituting an offer of (or any solicitation in connection with) any investment products or services by any member of the CoinShares Group where it may be illegal to do so. Access to any investment products or services of the CoinShares Group is in all cases subject to the applicable laws and regulations relating thereto.