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Systematic investing, in the form of managed futures, often called CTAs, rose to the attention of
the wider investment community particularly through its performance in 2008, when it delivered
strong returns against the dramatic losses posted by most other strategies. In the following years,
however, its performance has been somewhat lackluster, prompting several market
commentators to wonder if the managed futures strategy was ever to come back and whether the
diversifying performance of 2008 was something of the past, never to be seen again.
All strategies go through periods of underperformance and managed futures is no exception. The
long grind however did open up potential for some managers to evolve their systems to better
adapt to unusual conditions in future.
One type of evolutionary model that has developed is a combination of traditional Systematic
investing with fundamental macro. This strategy aims to take the positive attributes of systematic
investing, particularly those that make the strategy so powerful, whilst reducing the impact of its
shortcomings. This solution preserves the power of systematic investing while addressing the
drawbacks.
model that is overly back-fitted to past conditions, with the risk of decaying quickly or, even
worse, being suitable only for the specific conditions it was developed in.
There is often an inability in this approach to put an economic or financial connection to the data
analysed. The system by design typically treats the data in an aseptic manner, overlooking the
conditions which generated such data in the first place. This black box approach leads to a loss
of intuition in system behaviour dealing with certain market environments.
In systematic investing often times different models are used to deal with specific environments.
Subjectivity hovers around how much capital to allocate to say trend-following, mean-reversion,
pattern-recognition, or other strategies.
The above weaknesses in the systematic approach lead to an inability to look forward and
prepare for sudden, and frequently dramatic, changes in market paradigms. These have been
most visible in the economic environment post-2008 crisis, with the disappointing performance
of the strategy for an extended period of time. The exceptional intervention of financial and
monetary authorities to avert a global meltdown has essentially overridden market fundamentals
in this period. The consequence has been trendless, choppy, risk-on/risk-off markets, depressed
volatility and spiked up correlations between assets. These are all unfavourable conditions for
systematic investing.
A potential solution
One compelling solution to the problem is a combination of the systematic and fundamentalmacro approach, in the belief that it can deliver the positive attributes of both while hedging
out the negative ones. A relatively new foray into such an approach of combining fundamentalmacro and systematic is in quantamental investing, at this stage practiced mainly in equity
portfolios.
Fundamental-macro investing at the core
The fundamental-macro approach, based on the insights of experienced investment managers, is
by nature, both forward-looking and deeply connected to the changing economic and financial
conditions affecting markets. This makes it particularly suitable to spotting dramatic changes in
market behaviour. Furthermore, expert fundamental-macro investing harvests risk premia while
hedging with risk-averse, defensive positions. This serves as the right antidote, therefore, to the
backward-looking traditional systematic approach that lacks in economic intuition.
Aref Karim is founder, CEO and CIO of QCM, a systematic global macro manager with 20
years operating history