What is systematic investing?

Systematic: “Done or acting according to a fixed plan or system”.

Systematic investing (aka quantitative investing) is a data driven investment approach which follows a set of pre-defined rules and applies them in an unbiased way on a target universe. Each of the italicized terms tells us about important facets of the approach:

  • a) Data driven: Data is at the heart of any systematic strategy and is part of the idea and the implementation
  • b) Pre-defined rules: The logic which defines the decision-making process of the strategy
  • c) Unbiased: There is no scope for bias or ambiguity within the construct of a strategy and
  • d) Target universe: The set of securities to which the above-mentioned rules are to be applied.


Put simply, any strategy that has a preset definition of what to buy/sell, when to buy/sell, how much to buy/sell based on a defined data source could be classified as systematic.

There are many different terminologies that one often comes across when reading about investment styles: value, fundamental, technical, momentum and the list goes on. However, we believe that at the most basic level of separation, there are two distinct approaches: systematic and discretionary. All the above-mentioned styles can be implemented following a systematic or discretionary approach and both approaches can yield very similar outcomes as well.

The key difference between the two is that a discretionary approach allows for some variable amount of discretion at the decision-making stage. This could be in terms of what data to look at or ignore, which securities to include or exclude from the target universe or which set of rules or parameters to apply. The objective is to be flexible and allows for a human overlay on top of a broad process. In other words a discretionary approach could yield two varying outcomes (what/when/how much to buy/sell) at two different points in time, with most other data appearing similar. A systematic strategy will, on the other hand, be bound by the set of rules and data that it operates under. The table below highlights other key differences between these two approaches.

Systematic Discretionary
Key inputs Data that can be quantified
or classified
Quantitative and
qualitative data
Pre requisites Set of rules Broad framework or style
Scope Generally broad: same
approach can be applied on
multiple securities
Generally deep: customized
approach which relies on a
more wholistic understanding
Scalability Scales with data
and computing power
Scales with manpower
Portfolios Generally diversified Generally concentrated
Flexibility Only what the rules allow High

What is its applicability?

Systematic investing strategies can be applied to most liquid asset classes such as equities, indices, commodities, bonds and their derivatives, however equities remain the most popular segment. The only pre-requisite for this approach is the availability of clean and reliable data with regular updates. For example, within listed equities, this approach would be more suitable to a well- traded large or mid- cap stock with ample industry coverage as opposed to a low liquidity micro-cap stock, with little or no analyst coverage.

The approach is now present across most investment products in the listed space. An index fund or ETF is the most common form of an investment product that is rules based and most of us probably have some exposure to them, e.g. Nifty or Sensex index fund/ ETF. Smart beta funds or factor based index trackers are other popular examples of this. A lot of active mutual funds globally also follow a systematic approach and this style is gaining increasing traction in India over the last few years, with the launch of quant mutual funds. Hedge funds globally or Alternative Investment Funds (AIF) in India are very active in the space and some of the largest asset managers follow this approach.

Some of the most well-known global systematic asset managers are AQR Capital, Citadel, D.E. Shaw, Renaissance Technologies, Two Sigma Investments and Winton.

Why does it matter?

The rise of passive investing has already shown the need for a more disciplined rules-based approach and its advantages, while newer investment structures and products are increasingly likely to adopt a systematic approach. In the current age of big data and increasing computing power, this is an approach that will continue to extend itself across asset managers and investment products.

Categories : Systematic Investing
Tags : AlphamineSystematic Investing