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On The Style Edge

Discretionary versus Systematic

In our 2015 paper, ‘Hypercube in the Kitchen: Reading a Menu of Active Investment Strategies1 by Gnedenko and Yelnik, we showed how asset managers may be classified based on their skills. Our classification could be viewed as a five-dimensional hypercube. In this discussion we focus on one of its edges: discretionary versus systematic.

The systematic style represents a combination of a systematic strategy (a.k.a. systematic model)’s decisions, and those of the portfolio manager. Whilst the model’s trades are implemented by changing positions in financial instruments, the systematic manager’s trades are changes made to the systematic strategy itself.

Evaluation through statistical methods of investment managers, be they discretionary or systematic, is only possible within certain limits.

Similarities between discretionary and systematic investment management firms, in terms of their exposure to the key person risk, are stronger than is commonly believed to be the case.

Trade and its limits to statistical evaluation of managers

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