Nested Clustered Optimization (NCO)
A two-step optimizer that first clusters assets, optimizes inside each cluster, then optimizes across clusters using cluster-level statistics.
Category: Optimizer & Performance
What is Nested Clustered Optimization (NCO)?
NCO, also from Lopez de Prado, fights the curse of dimensionality by reducing the size of every covariance matrix it has to invert. It typically pairs with shrinkage estimators like Ledoit-Wolf for additional stability.