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Aspect Capital Insight Series

Advantages of systematic investing

ASPECT CAPITAL

Writing in 1923 about the famous discretionary speculator Jesse Livermore, the American author Edwin Lefèvre captured in a quote the frailties of human psychology when it comes to investing in financial markets: “It is inseparable from human nature to hope and to fear. In speculation when the market goes against you - you hope that every day will be the last day - and you lose more than you should had you not listened to hope… And when the market goes your way you become fearful that the next day will take away your profit, and you get out - too soon. Fear keeps you from making as much money as you ought to.”[1]

Fig.1 Examples of biases from the behavioural finance literature
Fig.2 WTI Crude Oil Price and Aspect Diversified Programme Exposure: Jan 2014 to Dec 2015
Source: Aspect Capital

In this paper, we review the key advantages of the systematic approach to investing. In addition to the avoidance of investment error due to psychological bias, a systematic approach offers several key benefits including: the scalability to invest with a consistent approach twenty four hours per day across a global portfolio of securities; the implementation of consistent risk management at security, asset class and portfolio level; and, the scientific rigor which can be devoted to the continuous development of the core investing approach. We also review academic evidence comparing the performance of systematic and discretionary CTAs and hedge funds.

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About The Hedge Fund Journal

Informing the Hedge Fund Community. With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.