INVESTING EXPLAINED: What You Need To Know About Systematic Funds – Investments That Rely On Mathematical And Statistical Analysis
In this series, we break down the jargon and explain a popular investment term or theme. Here they are systematic funds.
WHAT ARE THESE?
Hedge funds that choose investments based on big data and custom computer models rather than human research.
These funds are also referred to as quantitative or “quantitative” funds because they rely on mathematical and statistical analysis.
The experts behind these funds used to be called ‘quant jockeys’ or ‘quant jocks’. But using these terms to describe people with a PhD in mathematics and superior Excel spreadsheet skills is now considered a bit off.
WHAT ARE THE PROCESSES?
Traditional investment potential analysis considers such things as the strength of a company’s management and market conditions.
New direction: stock selection based on systematic or quantitative analysis involves different techniques
Stock selection based on systematic or quantitative analysis involves several techniques. For example, a focus on Amazon can show that the stock price is moving up or down after a period of peak trading in this stock.
Building a program based on Amazon’s performance in the period since it went public can reveal that the price has risen on 95 percent of such occasions – and predict the likelihood that it will continue to do so. That makes Amazon seem like a stock to buy.
AND THIS APPROACH DETERMINES WHICH SHARES THE FUNDS BUY?
Not necessary. Systematic traders will override their systems – some discretion is involved. This sets them apart from algorithmic traders who tend to go along with their systems’ decisions, which also rely on huge amounts of data.
The subtle differences between the systematic and algorithmic approaches are much less important than the key role they will play in the future with the increasing adoption of AI (artificial intelligence) in portfolio construction.
Active funds, which emphasize human judgment and intuition, are advised to adapt to the change.
WHY IS SYSTEMATIC TRADING IN THE NEWS?
These funds are said to be behind the rally in Wall Street this year, which was driven by the excitement around the ChatGPT AI system. Tech stocks are soaring, with Amazon up 51 percent.
Semiconductor giant Nvidia, maker of chips for ChatGPT, is up 196 percent.
Volatility control systematic funds that focus on volatility are particularly avid buyers of stocks.
This appears to be in response to the drop in the Vix index, the most widely followed measure of stock market volatility.
WHAT WAS THE EFFECT OF THIS?
Morgan Stanley estimates these funds gobbled up about $45bn (£34.3bn) worth of stocks, forcing traditional hedge funds that had gone ‘short’ on the stock – believing their value would fall – to sell at higher prices. buy back prizes to complete these deals. They borrow the shares from investors and have to return them.
WILL THIS TREND CONTINUE?
Depends on how markets respond to concerns that US interest rates may need to be raised further and faster to contain inflation. Systematic fund systems can lead to more purchases of tech stocks. Goldman Sachs thinks Ndivia shares are poised for growth.
Social media group Meta is also drawing interest, which has attracted 100 million users to its Threads platform.