“I can’t be right only because I hold a senior position in the firm – I have to back it up with solid data and logic,” says Leda Braga, about the internal debates that are part of the culture of intellectual honesty at Systematica Investments, a firm she founded in 2015 and oversees as CEO. If that sounds to you like the type of environment in which innovation would thrive, you’re correct – and it’s one of many reasons that Systematica was a finalist for Quantitative Hedge Fund of the Year in the 2020 Institutional Investor Hedge Fund Awards. As II learned in a conversation with Braga, innovation is seemingly everywhere at Systematica, whether that means redefining transparency or branching out to seek fresh opportunities in more complex and sophisticated strategies and markets.
II: Something that is immediately apparent in conversation with you is that you don’t just pay lip service to transparency. You pride yourself on it and the ease of access investors have. Why is that?
Leda Braga: There are two reasons. Systematic and quantitative investing are often labeled as “black box” trading, which is inaccurate and unfair. We want to debunk that myth and help investors become aware that we are very process-driven and we articulate our process to a high degree of detail. Discretionary traders show up and talk about macroeconomic data, what’s in the news, what they feel will happen based on their experience. That human connection tends to give people a lot of comfort, but it doesn’t diminish the opacity with which most discretionary managers operate. If anything, we are a glass box, with a systematic process where everything is very well articulated.
And the second reason?
Collectively, what investors and asset managers do is very difficult to do well. What we do at Systematica, for example, works very well in the long term, but in the short term there are bumps and occasional wobbles, and transparency helps investors develop confidence to stick to the long-term plan. It is just awful to see an investor redeem right after a drawdown, and the only remedy I can offer to that is to be transparent so they can be confident that our strategy, thinking, people, and processes are sound, that we have an open environment, and that we’re very honest.
Do you sometimes worry about being too transparent?
Yes, there are risks, and we try to balance them out. I always say to investors that we will answer any question they care to ask. We might not send you a technical note with model details and equation details, but verbally we will answer any question you care to ask – however, there is a point at which the investor is aligned with us to protect the intellectual property that is powering their investment.
Is transparency within the firm important, too?
There are some very well-known hedge funds – big shops – where returns are not made public within the firm. At Systematica, we want people to have a sense of urgency and know how and where they fit in the overall plan, so we have monthly meetings of the whole team to let people know where their contributions fit in the context of returns. Along the same lines, many firms prohibit researchers from communicating to each other because of the risk someone will take intellectual property with them to a competitor. We feel the risk of that happening is far outweighed by the uplift in productivity that results from having a cooperative research team. We promote an awareness within the research team of everything that is going on. We’re not necessarily asking each researcher to go into great detail of what each strategy does, but we don’t hide it, either.
Systematica pursues strategies in more complex asset classes – credit default swaps, for example – that many other quant firms don’t. Why push beyond the norm?
It’s the natural evolution, and I suspect other systematic shops are probably doing it but just not so openly. If you were a quant 20 years ago, price data was pretty much the only data, but today our access to data and our ability to use it is phenomenal – if you’re trading a market, you’re publishing your data, and that data is making its way somewhere, and the volume traded is being recorded somewhere. That lends itself to systematic trading in asset classes that you wouldn’t have dreamt of in the not too distant past. When complex strategies become more electronically driven, they are more amenable to systematic trading, which in turn makes sense commercially because clients today demand low fees and the systematic commercial model is much more scalable.
A goal of yours is to systematize what human traders do in a type of human-machine hybrid approach. What are the benefits of that?
The institutional investor community needs low fees and efficiency, to which scale is the answer. If we can learn what traders do and systematize it, we can not only offer it at scale – we can really measure it in detail and improve it. If the same person makes the same recipe every day and never reveals the ingredients, you can never really know how you might slightly change that recipe, and to what effect. By systematizing strategies, you understand every component. Where’s the signal coming from? How are you calculating the position size? The idea is that if it can be done by a person, it can probably be attempted by a machine – so let’s give it a try. It makes sense to minimize and eventually remove the barrier between what is discretionary and what’s systematic. Let’s just open the gates and combine them both and see where we go from there. It’s exciting too, and it opens a whole range of new opportunities.
More than half of your assets are in trend-following strategies. Is that purposeful?
It’s not by design that we have such a large asset base in trend following, rather there is investor demand for it. We started our life as a team with a trend-following strategy back in the early 2000s, so we have a long track record in that space. As you pointed out, we also do derivatives, foreign exchange options, interest rate swaps, credit, equities, and so on. Even with all of those other strategies, however, trend following is hard to beat in periods of market stress because of its very unique diversification qualities and lack of correlation – so it keeps its place in many portfolios. But we are always developing new strategies – more recently, in relative value, for example, and we have just rolled out a strategy that trades equity options.
With its perceived focus on extreme market stress, some investors question whether trend following can generate enough day-to-day positive return to make it a worthwhile part of their portfolio. What do you say to that?
Some investors want their strategies to carry positive returns whether the market is in crisis or not – in other words, they like the insurance policy, but they want that policy to pay them something every year, even without the occurrence of an event that would trigger a payment. Recognizing this, we’ve spent a great deal of time and effort over the past four years entirely reshaping our approach to trend following. We still have our original model that launched in the early 2000s, but we also have four new trend following formulations – and we didn’t just tweak the premise of the original one. It has become increasingly more accepted that trend following implemented on the more complex asset classes tends to carry quite well day to day, so we have seen strong investor interest and asset growth in this area. So, now investors can choose from the various trend following strategies, and combinations of them, to better align with their objectives.
Customization is high on the list of investor demands today. How are you approaching that?
We committed to customization from the outset of Systematica because we knew our institutional investor base would sometimes require it. We have very scalable technology for creating new combinations of strategies, and our legal team came up with a multi-fund concept with a large umbrella fund under which investors can launch a new sub-fund at no cost. That sub-fund belongs to the investor, who can use it to invest in a tailored combination of our funds with optimized fee arrangements. In short, we have a scalable legal set up as well. On a related note, a customization is also being driven by asset owners who want fewer but stronger manager relationships. As you might imagine, in conversations with our investors we hear about things that they’re looking for, and if it’s at all possible that we can deliver it, we combine it with their existing investments with us, and it usually works out better on a cost basis for the investor. Another important area where client dialogue shapes our development and offering is ESG integration in our investment process. In particular, we have benefitted from valuable exchanges with our clients to firm up an investment framework based on ESG considerations for risk mitigation and alpha generation in public equity markets. Here, too, we are more than happy to respond to their individual requirements.
As the founder of Systematica, you set the tone for company culture. What is your vision in that regard?
We strive for a culture of intellectual honesty. There’s no seniority when it comes to challenging each other’s comments and views. I can’t be right only because I hold a senior position in the firm – I have to back it up with solid data and logic. I think intellectually strong people like the fact that we can be debaters, and that it’s not political or hierarchical. The fact that people are free to articulate their opinion and know they will be heard means we can nimbly move in different directions as the business needs to. Our investors and partners are aware of this, too – we’ve had several of our investors and partners tell us they’ve noticed that when we decide to launch a fund or a product or a whole new business, we point the resources of the entire firm in that direction and very quickly get it done.
What do you think the future holds for investing in general and Systematica specifically?
Symptoms of a maturing industry are in plain sight – profit margins have been reduced, and there’s some consolidation happening. The simple, easy strategies won’t go away, but constant price reduction requires them to be more efficient and more automated. For us to grow and investors to see new opportunities in the future, we’ll pursue trading in more complex markets and strategies. That means a focus on continuing to do things in a scalable way while ensuring that we don’t compromise the model to achieve scale, and to continue to systemize new areas. In the spirit of pursuing opportunities by trading complex markets, we are planning an expansion of our activities in China – there’s a lot going on there. China is an exciting market for us and we look forward to being more active there.
Overall, the spirit of our endeavors will remain unchanged: quality execution and research achieved very efficiently from a commercial perspective; and the development of more sophisticated strategies and products to unearth and pursue opportunities in more complex markets.