“It is only by selection, by elimination, by emphasis, that we get at the real meaning of things”, Georgia O’Keefe.[1]
One of the key objectives of systematic modeling is an effort to simplify decision rules to get to the core of what may drive markets. This is a search for meaning. This core objective is based on an assessment of what are expected to be repeatable future events that have a basis in theory or conjecture.
A systematic approach often avoids headline risk and focuses on market fundamentals and price action. In its most simplified form, a systematic model is follows trends as a signal extraction process. We, however, try and form a structure that includes economic fundamentals because we believe that a program of different styles will provide valuable diversification in an unstable world. Behavior is repeatable but also moves through cycles. The focus on longer-term fundamentals as well as other styles captures the changing emphasis on factor risks.
The simplified design of decisions can be condensed into a case, a combination of observation rules, an action, and a result.[2] Systematic investing emphasizes not only finding data relationships, but employing these relationships to take well-defined or described actions within a portfolio. The decision actions are structured rules so that their impact on the portfolio is controlled. Defined market exposures tied to a rule will allow for better risk management.
[1] For a more popular interpretation, “In building a statue, a sculptor doesn't keep adding clay to his subject. Actually, he keeps chiseling away at the inessentials until the truth of its creation is revealed without obstructions.” - Bruce Lee (from Ross Pazzol.)
[2] We have been influenced by the work in cognitive psychology on case-based reasoning. The approach of measuring experiences to use as an event reference catalogue is applicable to finance. Case-based reasoning has been effectively used as a diagnostic tool in medicine and other disciplines.
No comments:
Post a Comment