Diversification
Diversification is reducing idiosyncratic variance by combining imperfectly correlated risks — it does not cancel a common factor.
Definition
Diversification refers to it does not cancel a common factor. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
It shows up in factor research, attribution, and capacity debates — whether a return slice is skill, style, or fee drag. When it does not cancel a common factor shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what diversification is saying. If it does not cancel a common factor moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Check definition stability across universes, costs, and regimes before treating a backtest as portable. Prefer a short written null hypothesis for Diversification: what would falsify the current reading in the next window?