“True risk isn’t volatility. True risk is missing the outlier because it wasn’t in your universe.”

Traditional investing preaches diversification as the ultimate risk reducer. It’s the core principle behind Modern Portfolio Theory (MPT): spread your capital across many assets, reduce volatility, and avoid catastrophic losses.

But this obsession with diversification often leads to the wrong conclusion—that casting a wide net automatically weakens outlier impact.

For Outlier Hunters, the reality is different. We champion maximum diversification—not because it reduces risk, but because it maximizes opportunity.

Unlike conventional investors, we don’t stay in the market at all times. We maintain a broad watchlist—but only act when the probability of capturing an outlier is high.

Even more importantly, as a trend emerges, we do the opposite of what traditional diversification suggests—we progressively concentrate into the Outlier.

This is a critical distinction that many fail to grasp.

Diversification vs. Dilution: The Key Difference

The typical critique of diversification in trend-following goes something like this:

“If you spread yourself too thin across hundreds of markets, you dilute the impact of outliers. You’d be better off concentrating on a few strong trends.”

This sounds logical—but it misunderstands how outliers actually drive performance.

• Outlier Hunters don’t participate in every market all the time—we participate only when a material signal emerges.
• The bigger the watchlist, the better the chance of capturing the next outlier.
• Our edge doesn’t come from having a concentrated portfolio—it comes from ensuring we never miss the big moves.

Once we identify an outlier move, we concentrate our exposure to it—allocating progressively more capital as the trend strengthens.

The biggest risk isn’t being too diversified—it’s missing the outlier altogether.

The Science of Outliers: Why Maximum Diversification Works

1. Power Laws & Fat Tails

Financial markets do not follow a normal distribution. They are dominated by fat-tailed, power-law dynamics.

• Benoît Mandelbrot’s fractal markets hypothesis and research on power laws in financial markets prove that outliers dominate long-term returns.
• Nassim Taleb’s “Extremistan” concept shows that a small number of extreme events determine the majority of returns.

The Implication for Outlier Hunting:

• A small percentage of trades account for most portfolio gains—meaning missing an outlier is far worse than taking a small loss.
• A broad universe ensures no potential outlier is missed.
• Outliers drive market performance, not mean-reverting moves.

2. Optionality & Convex Payoffs

The best trading strategies have asymmetric payoffs—small, controlled losses and large, convex wins.

• Taleb’s optionality principle shows that the best traders don’t predict—they position for asymmetry.
• The Kelly Criterion validates progressive bet concentration—increasing allocation as a trend proves itself.

The Implication for Outlier Hunting:

• Small positions across a wide universe create optionality.
• As a trend proves itself, exposure increases, maximizing the convex return.
• Blind equal-weight diversification reduces asymmetry, lowering the potential for compounding returns.

3. Evolutionary Biology & Selection Pressure

Markets evolve under selection pressures—only the most adaptive trends survive.

• John Holland’s Complex Adaptive Systems research proves that systems evolve based on past conditions—not by reverting to equilibrium.
• Andrew Lo’s Adaptive Markets Hypothesis shows that market regimes shift over time, requiring strategies to adjust dynamically.

The Implication for Outlier Hunting:

• Markets evolve—meaning static diversification models fail over time.
• Like in nature, broad diversity is essential—but only adaptive strategies survive.
• Our approach mimics evolution—we diversify broadly but concentrate as the strongest trends emerge.

4. Trend Persistence & Market Microstructure

Markets don’t move randomly—price trends emerge from trader positioning, liquidity constraints, and self-reinforcing order flow.

• Albert S. Kyle’s Market Impact Model shows that price impact is nonlinear—larger orders disproportionately move markets.
• Jean-Philippe Bouchaud’s Market Impact Research shows that trends persist due to feedback loops in trader behavior.

The Implication for Outlier Hunting:

• Maximum diversification ensures access to markets where liquidity dynamics align.
• Trends persist due to market structure—not fundamentals.
• Capital must concentrate into persistent trends to capture their full potential.

Outlier Hunting: Maximum Diversification, Selective Participation, Progressive Concentration

• Maintain a wide watchlist. Maximum diversification is about exposure to opportunity—not blind allocation.
• Only participate in material signals. If the probability of an outlier is high, we act. If not, we stay out.
• Let the tails drive performance. 5-10% of trades drive returns. Ensuring access to that 5-10% is key.
• Concentrate capital into emerging outliers. The more a trend proves itself, the more capital it commands.

Final Thought

Outlier Hunting embraces maximum diversification—not to spread risk, but to ensure we never miss the next big move.

And once that move emerges, we concentrate capital into it, maximizing asymmetry.