025 - Laurens Bensdorp - Balancing 55 Super Models

The Power of Multi-Strategy Diversification

In this episode we were able to shine the spotlight on Laurens Bensdorp, a seasoned trader renowned for his innovative approach to systematic trading. Laurens, who currently resides in Portugal, shares his deep insights into the art and science of trading over 55 strategies, offering listeners a glimpse into the intricate balancing act that defines his success.

A Multi-Faceted Approach to Trading

Laurens’ trading philosophy revolves around diversification—not just in markets, but primarily in the strategies themselves. He is famous for referring to the art of building new strategies which compliment his existing suite as “designing models to fill potholes”.  He trades across various styles, including trend following, rotational momentum and mean reversion, and he manages these strategies across both long and short strategies. By doing this, Laurens aims to capture profits in all market conditions, whether they are bullish, bearish, or sideways. He calls this his “4 quadrants”. Note that the short trend following strategies are not in individual stocks (that’s not easy to do), but in ETFs. Adding to his stock strategies is a portfolio of futures strategies, and these are trend following only. However, to date his primary focus and allocation has been to stocks.

The foundation of Laurens’ approach lies in what he calls the "four legs" of his trading strategy: trend following long, trend following short, mean reversion long, and mean reversion short. These four legs are the bedrock upon which he builds a diverse array of strategies, each designed to perform under different market conditions.

Strategy Design Process

An essential take-away from Laurens is his process for building and validating his models.

He insists it all starts with having a strict design objective, which informs your expectations. If the objective is to build, say, a hedge strategy, then just because the compound annual growth rate is terrible doesn’t mean it isn’t perfect for the job (which is to be insurance, and insurance always costs money, but saves you big time when you need it).

Not only should you be able to imagine and answer all the possible objections of critics reviewing your work, you must yourself ask the right questions when testing, especially these three: when will this strategy make money; when will it lose money; and what are the risks I haven’t actually seen yet in the back-test? Experience teaches us broadly what works and what doesn’t, so it gets easier and easier to spot over-fitting. If it’s too good to be true, it definitely is, every time. Different factors should generate returns at different times. If you have one models that ‘always works’, you’ve built a monster, and one day it will fight back. The real answer is to have multiple models that all wax and wane at different times.

For Laurens, diversification is not just about spreading bets across different markets but also about ensuring that his strategies are fundamentally different from one another. This diversity is crucial in smoothing out the equity curve and achieving higher risk-adjusted returns.

Risk Management – The Backbone of Successful Trading

Laurens diversifies within each leg of his portfolio. By spreading risk across different strategies, stocks and time frames, he mitigates the impact of adverse market events. Laurens highlights the importance of avoiding overexposure to any single stock, especially in equities trading, where corporate (idiosyncratic) risk can result in unexpected losses.

Hidden tail risks reside in almost all back-tests. These lurk just below the surface waiting for unsuspecting prey. Individual equities can halve in price tomorrow, or worse, double (if you’re short, that’s way worse right). Small bet sizing is the ultimate first line of defense here, trumping just the multi-model approach.

Laurens defines stop losses as critical, even in strategies like mean reversion, where conventional wisdom might suggest otherwise. These stop losses are a non-negotiable part of his risk management arsenal, serving as an "emergency brake" to protect against catastrophic losses. And that despite how the back-test looks. Are you getting the theme here? There is an art in applying the science. Experience counts.

Laurens also shares his approach to managing the unique risks associated with short selling, particularly in stocks prone to dramatic corporate events, such as biotech stocks. He stresses the importance of liquidity and trying to find methods of avoiding stocks with irrational behaviour, like meme stocks, which can wreak havoc on short positions.

The Role of Automation in Managing Complexity

Trading 55 strategies might seem like an overwhelming task, but Laurens manages it with the help of sophisticated automation tools. Developed in-house, his software allows him to back-test, manage, and execute trades across all his strategies efficiently. This level of automation ensures that he can maintain his diversified approach without getting bogged down in the minutiae of daily trading activities.

Lessons from 2022 – The Importance of Patience and Adaptation

The conversation also touches on the challenges of 2022, a year that tested many traders, both mean reversion traders and trend followers. He admitted that it was a tough year for mean reversion strategies, but he emphasized the importance of patience and sticking to a well-thought-out plan. Quitting too soon can be deadly, but this is why it’s critical to have a real faith in one’s strategies. If you’re not personally convinced by the weight of evidence that your strategies will hold up, then you’ll be quick to drop them in an adverse environment. Laurens' ability to weather the storm in 2022 was a testament to his disciplined approach and belief in the long-term validity of his methods.

The Future of Trading – Continuous Improvement and Learning

Laurens Bensdorp’s trading journey is a constant process of learning and adaptation. He emphasizes the need for traders to continuously evaluate and refine their strategies, keeping an eye out for hidden risks and potential market changes. His approach to strategy development is rooted in clear objectives and a deep understanding of when and why a strategy should make or lose money.

Laurens appearance on "The Algorithmic Advantage" provides a masterclass in diversified systematic trading. His insights into the importance of diversification, risk management, and the use of automation are invaluable lessons for traders at all levels. As Laurens aptly put it, successful trading is a marathon, not a sprint—requiring patience, discipline, and a relentless focus on risk management. It’s definitely an elite sport, and from day one you’re competing with the best, despite how easy it seems to place your first trade.

For those looking to delve deeper into systematic trading and gain mentorship from a seasoned professional, Laurens offers a mentoring program through his platform, Trading Systems, where he helps traders develop and refine their strategies, ensuring they are well-prepared for the challenges of the markets.

Stay curious.

Connect with Laurens

Laurens’ Website

Laurens’ Coaching Site

Laurens on X

Laurens on Linked In

Laurens’s books:

Automated Stock Trading Systems: A Systematic Approach for Traders to Make Money in Bull, Bear and Sideways Markets

On Amazon 

The 30-Minute Stock Trader: The Stress-Free Trading Strategy for Financial Freedom

On Amazon