Best of Both Worlds

by | Apr 2, 2020

Last week, Gillian Tett of the FT made the case  for “respecting the wisdom of diverse views to avoid tunnel vision.”

We agree.  Nailing your flag to the mast of a single, “silver bullet” investment style is a fast-track to over-confidence, inflexible thinking, and portfolio underperformance. This can be particularly true when there is a discontinuity or a regime change.

Instead, hybrid thinking – deftly integrating quantitative and qualitative, systematic and discretionary, short and long-term investment frameworks can materially help to identify unobvious opportunities, maximise the probability of superior, consistent risk-adjusted performance and reduce the risk of catastrophic portfolio errors.  We call it diversifying your insight, and we think it’s just as critical as diversification of holdings.

Why?  Put simply, rigid systematic strategies by their very design cannot handle a change in a parameter that is not measured in the system (in current markets, this would be the virus / global health issues and a range of secondary impacts). On the other side of the spectrum, a pure discretionary framework cannot handle the vast amount of data that is now available. Unsurprisingly therefore, discretionary investors risk missing the signal or data point which matters most given the inability to process the rapidly growing body of available information manually.  In short, we think there is a significant opportunity for investors to integrate the best of both worlds – systematic with discretionary.

The period leading up to the recent sell-off was a textbook example of the risk of over-reliance on a single approach – and the opportunity uncovered by integrating systematic and discretionary.

For example, ClearMacro’s short-term framework (figure 1 below) is dependent on systematic data signals, and has been successful in the past at highlighting market risk ahead. However, at the end of January it gave no indication of the impending catastrophe.


Fig 1: ClearMacro’s short-term (0-6m) data-driven framework was bullish at the end of January, heavily dominated by activity and technical data-driven signals.

But a different approach – our thematic framework – was signalling caution. This framework aggregates cycle-specific qualitative insights to a single view.


Fig 2: But the medium-term thematic framework was bearish at the end of January 2020, driven by late-cycle investment theme insights.


And yet another approach – our systematically driven long-term returns estimates – had fallen to all-time lows going into February.


Fig 3: And the long-term return framework was extremely bearish, with the 3-5+ year estimate of US equity returns (local market returns shown below) hovering just above 0%, a 20-year low.


We think the utility of data-driven approaches is not limited to providing answers or suggesting specific trades – but, perhaps even more importantly, can also add value if they help the investor to ask the right questions.  This is where the highly bifurcated worlds of quant systematic investing and discretionary judgement-based investing can be brought together in a very accretive manner. In this particular case, we think that the above combination of approaches could have helped to spark the right question for a hybrid investor:

Might the market be set up for asymmetric downside risk given most investors appear to be following obvious short-term positive signals while there are concerning money flow developments occurring in the background and valuation prospects are the worst in 15 years?

No approach is right all the time.  An investor who only focused on the short-term outlook would have failed to fully benefit from the start of the market slide.  On the other hand, over-focusing on medium or long-term return prospects could have led  an investor to be too early, and miss the significance of dominant short-term trends.

There’s no easy answer. However, we are strong believers that most investors would benefit from leveraging diversified insights from multiple investment frameworks in order to ask better questions, ultimately generate a conviction level and optimize the allocation of capital. At ClearMacro, we provide our users with flexible inputs into their hybrid decision-making processes.

ClearMacro – we don’t have all the right answers, but we can help you ask the right questions.

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