Systematic Managers: Definition, Investment Approach, and Examples
AB
Summary:
Systematic managers are portfolio managers who base their trading decisions on price trends rather than fundamental analysis. They employ predetermined rules to determine when to buy or sell securities, focusing on removing emotional biases from investing. This article explores the role of systematic managers, their investment approach, and how it differs from discretionary management.
Compare Investment Advisors
Compare the services, fees, and features of the leading investment advisors. Find the best firm for your portfolio.
What is a systematic manager?
A systematic manager is a portfolio manager who adjusts a portfolio’s long- and short-term positions based on price trends of particular securities. Unlike discretionary managers who rely on fundamental analysis, systematic managers allow a security to remain part of the portfolio as long as its price stays above a predetermined level.
Understanding systematic managers
Removing emotional biases
Systematic managers aim to eliminate the behavioral component of investing, which can lead portfolio managers to become attached to unprofitable securities or trading ideas. By employing predetermined rules for buying and selling securities, systematic managers remove the emotional aspect of investing, making decisions solely based on established criteria.
Investment approach
The investment method of systematic managers focuses on price trends rather than fundamental analysis. They may choose to hold a position as long as the spread between the current market price and a predetermined stop-loss price remains positive. This approach allows systematic managers to capitalize on long-term trends while minimizing emotional biases.
Differences from discretionary managers
Systematic managers adopt an approach opposite to discretionary managers. While systematic managers prioritize price trends and adhere to predetermined rules, discretionary managers may analyze the fundamentals of a security to determine their trading decisions. Additionally, systematic managers may take short-term positions if unique opportunities arise, despite their focus on long-term trends.
The role of systematic managers
Systematic managers play a crucial role in investment management by providing a disciplined approach to trading decisions. Their systematic approach helps to mitigate emotional biases and maintain consistency in portfolio management, ultimately aiming to achieve long-term investment objectives.
Example of a systematic manager
In its simplest form, a systematic manager may decide to buy shares of a particular stock at a specific price and set predetermined levels for selling. For instance, if the price falls below a certain threshold, the manager would sell to minimize losses, or if the price rises to a certain level, the manager would sell to realize profits. This approach allows systematic managers to make objective trading decisions based on price movements rather than subjective analysis.
Frequently asked questions
What distinguishes systematic managers from discretionary managers?
Systematic managers base their trading decisions on price trends and predetermined rules, whereas discretionary managers rely on fundamental analysis and may deviate from established rules based on their judgment.
How do systematic managers mitigate emotional biases in investing?
Systematic managers remove emotional biases by employing predetermined rules for buying and selling securities, thereby making objective trading decisions based on established criteria.
What are some examples of predetermined rules used by systematic managers?
Predetermined rules may include setting stop-loss levels, profit targets, and trade sizes based on historical data and technical analysis.
Do systematic managers always follow the same set of rules?
While systematic managers typically adhere to predetermined rules, they may adjust their strategies based on market conditions or changes in investment objectives.
What are the potential drawbacks of relying solely on price trends?
Relying solely on price trends may result in missed opportunities not captured by technical analysis, and systematic managers may be susceptible to losses in volatile markets if trends suddenly reverse.
Key takeaways
- Systematic managers base trading decisions on price trends.
- They aim to remove emotional biases by employing predetermined rules.
- Systematic managers differ from discretionary managers in their approach to investment management.
Share this post: