Stop Chasing Strong Signals. They Might Be Hurting You.

Introduction

You come up with a signal, do the work to implement it, backtest it and see a sharpe of 2. You're GIDDY with excitement. This is the BREAKTHROUGH you're looking for. You send the signal off for evaluation to your team/firm's central value-add pool, only for the signal to be rejected.

What the hell just happened? The problem isn’t with your strategy’s sharpe. It’s the correlation!