Why investment “systems” aren’t all that bad.
To err is human. We aren’t always logical and we make mistakes (or gains) based on emotional reactions. Sometimes we get lucky and other times we lose. Some hedge funds get a bad rap for trading under the systematic model or ‘black box’. But is it all that bad?
We define ‘system trading’ as “Rules-Based”. To us, it means creating a process and set of procedures around the investment proves. This includes how and when to enter an investment, and how and when to exit. It ensures that we are consistent and doing things for logical reasons, and not getting caught up in hype and emotion. We know, we know – this isn’t very exciting, but it makes the process more reliable.
Think of it like this:
You’re on a plane home to Calgary from New York. You get settled on the plane and the pilot makes an announcement: “good news folks, we’re heading back to Calgary, you’ll be home in a few hours. Bad news, our flight systems are down.” What do you do?
You get off that plane. Why?
Because you trust that the logic behind auto-pilot systems and computer programming will keep you safe. You can’t trust human intuition alone; if you do, you could be taking a huge risk. The same goes for rules-based alternative investments. ‘Black box,’ or systematic, models, such as quantitative investments and calculations, help build consistent and reliable strategies. We can articulate risk well with these systems.
Flight software is an integral component to a safe flight, but it isn’t intended to takeover entirely. These types of systems act as guides to the human in control. When you get on a plane, you hope that the pilot is acting in a consistent and systematic matter. Our strategies are no different. These systems keep you safe. CTAs like Auspice design strategies utilizing a Rules –based approach to remove those fundamental decisions.
Would you get on that plane?