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  • Writer's pictureEng Guan

7 Myths About Systematic Investing

Investing is like a personal dance with the market. Some prefer to tango with 𝘀𝘆𝘀𝘁𝗲𝗺𝗮𝘁𝗶𝗰 strategies, while others sway to the rhythm of 𝗱𝗶𝘀𝗰𝗿𝗲𝘁𝗶𝗼𝗻. Most of us would lie somewhere in between. And many are closer to the latter camp. Although systematic approaches are much better understood and accepted these days than when I first entered the industry, some "myths" persists. As a systematic investor, let me share some of these and try to clear them up once and for all.

Myth 1 - Systematic Investing is a black box

Myths of Systematic Investing - Black Box

Not all are black boxes. They can be rule-based models that use well-defined fundamental or technical criteria. They can also be quantitative models that exploit relations between certain factors and valuations. There are many more. But the bottom line is they operate within clear and well-understood boundaries. You can explain how and why these models work.

Myth 2 - All systematic strategies are automated

Myths of Systematic Investing - Automation

Systematic and automated are 2 different things. You can be a systematic trader but still choose to manually place your trades. But if your strategy is entirely systematic, yes, it can be automated. And sometimes, it is necessary e.g. if you are trading in fairly high frequencies, require round-the-clock monitoring, etc. Otherwise, the choice is yours.

Myth 3 - Systematic strategies are highly complex

Myths of Systematic Investing - Complex Rocket Science

Who says systematic strategies have to be complex? Just because no one tells you how they build their models, that does not mean they are complex. Many aren't rocket science. A simple moving average trend-based model is systematic.

Myth 4 - Systematic is 100% science and Discretionary is 100% art

Myths of Systematic Investing - Art Vs Science

Discretionary is not all art, and neither is systematic all science. Discretionary investors are also guided by rules which they have internalized through their experience. But these rules tend to be less well-defined and prone to changes. I have worked in a hedge fund where more than 10 intern traders were trained on the same set of investment philosophies and methodology, but all came up with very different trading results at the end of the internship. Surprised?

Myth 5 - You can completely decouple emotions in systematic approaches
Myths of Systematic Investing - Emotions

Another big myth. It is the system or strategies that have no emotions, not the investor, unless he is not human, to begin with. They can still meddle with their strategies on the fly, overriding the system's decisions based on their whims and emotions. Even if your system is fully automated, you can still tweak or shut it down anytime. So discipline is still key.

Myth 6 - No strategies last forever, all systematic traders will eventually fail

Myths of Systematic Investing - No strategies last forever

This is not entirely invalid. But there are some strategies that have worked and are still around for the longest time. But more importantly, the same thing applies to discretionary traders. The market evolves and it can make strategies obsolete. That is why it is important to adapt. You will have to monitor old strategies and constantly research and develop new strategies to keep pace with the ever-changing market.

Myth 7 - Historical results are no guarantee of future results, so backtesting is useless.

Myths of Systematic Investing - Nothing is a guarantee

If you are looking for guarantees in financial markets, you are looking in the wrong place. We don't backtest to look for guarantees, we backtest to understand and validate our strategies: their strengths, their weaknesses, and what can we expect. Just ask yourself a simple question: if a strategy you conceived cannot even work as you think it should with past data, then what is even your basis for it to work going forward?


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