What Is a Systematic Manager?

A systematic manager adjusts a portfolio’s long- and short-term positions on a particular security according to price trends. Systematic managers allow a security to remain part of the portfolio as long as the price of that security remains above a predetermined level.

Key Takeaways

  • A systematic manager is a type of portfolio manager that makes trading decisions based on price trends.
  • A security can remain part of a portfolio as long as it stays within the predetermined levels set by a portfolio manager. Once outside of the parameters, a stock will be sold.
  • The investment method of systematic managers removes the emotional component of investing and relies solely on how the price of a security moves.
  • Systematic managers stand in contrast to discretionary managers that rely on fundamental analysis to determine when to enter or exit positions.
  • Long-term views are what systematic managers focus on, but they may take short-term positions if unique situations present an opportunity for profit.

Understanding a Systematic Manager

Systematic managers attempt to remove the behavioral component of investing, as some investors believe this can cause portfolio managers to become attached to securities or trading ideas that are no longer profitable.

The portfolio manager takes a systematic approach to whether a security will remain in the portfolio, and will sell the security or close the position if its price no longer fits within the established rules. This completely removes the emotional aspect of investing and allows the portfolio manager to make decisions based on predetermined rules.

This investment approach is similar to the macro approach taken by investment managers but is applied across multiple markets. The systematic manager may, for example, decide to continue to hold a position as long as the spread between the current market price and the predetermined stop-loss price is positive. The longer a particular price trend has been going, the greater the difference between the market price and the stop-loss price tends to be.

The Opposite of Discretion

Systematic managers have almost the opposite approach to investing than discretionary managers. Systematic managers stick with a trend regardless of the fundamentals of the security, as the manager is focusing on the price of the security. Discretionary managers, on the other hand, may examine the fundamentals of the security to determine whether the long-term price trend makes sense.

While systematic managers primarily focus on long-term price trends, they may take short-term positions in securities that may conflict with the long-term trends they adhere to. This is because short-term factors, such as a sudden price change, may present an opportunity. For example, the manager may have a bullish view of oil in the long term but may take short-term positions with the expectation that the price of oil may fall.

Most quantitative trading techniques are systematic in that parameters are established and computer programs are put in place to automatically make trades when certain targets are reached.

Example of a Systematic Manager

For example, in its simplest form, a systematic manager may decide to buy XYZ shares at $10, and then set predetermined levels at which they would sell the stock. For example, if the price falls to $8.50 the manager would sell and realize a loss of $1.50 or if the price rises to $12, the manager would sell and realize a profit of $2.

Here, the portfolio manager is making their decision based on the price trend. The manager is not looking at the fundamentals of the stock to see if the price changes make sense, whereby it might result in them holding the stock longer, despite the price movements.

For example, if the fundamental analysis of the stock determines the price will go to $14, but it has dropped from $10 to $8 to $7, a systematic manager would have sold it at their price level of $8.50 whereas a discretionary manager will hold on to it even as it has fallen to $7 because they believe it will go to $14.

The reality is more complicated, however. The price targets may be determined by backtesting and technical analysis, looking at key support levels for the shares. Trade sizes, profit targets, and a host of other measures may come into play.