overview

Investment Strategies

There are different types of fund investment styles. Most funds would be using a mixture of strategies to generate orders which they intend to place on the market. I aim to go over these styles briefly here.

1.0 What is an Investment Strategy

A investment strategy is a methodology on how assets are bought they broadly follow two main categories:

Investment Strategies  A broad overview of the different investment strategies, long term and short term is used loosely here where long term can mean a few days to months and short term can be sub-second and maybe over the entire day.

2.0 Discretionary

This is a more traditional style of investing which involves using "Fundamental" Economic Analysis to develop theories about which assets to invest in and executing that strategy. Discretionary trading is not to be underestimated. good discretionary trading involves years learning stock market behaviour which provides an "instinct" on stock market reactions. This method still has the edge over algos in reactionary market conditions where a human can "see" an event that the algorithm has no "experience" of.

3.0 Quantitative

These strategies involve using quantitative models to find and create trading strategies.

3.1 Systematic

Researchers create Quantitative (generally statistical) models on assets and how they behave in the market over a period of time. These models are then deployed to the market and, depending on the fund, executed automatically.

Arbitrage

These focus on correlations between stocks and where there are mispricings that can ocurr e.g. a single stock vs an index, the change of the single stock may be indicative of the index/sector etc.

3.2 High Frequency

High Frequency trading (HFT) consists of buying and selling large volumes of trades in short periods of time, all decisions are made by computer models. They generally fit into the following strategies

  • Arbitrage
  • Market Making
  • Oscillator Investing

3.2.1 Arbitrage

Most of these strategies focus on exploiting price differences. These can be over short periods of time (latency arbitrage) or between an asset and the contract on that asset (statistical arbitrage).

3.2.2 Market Making

These strategies work by acting as the middle man between the client and the exchange and anticipating orders and reacting to market flow. These are used by investment banks as well as specialised funds.

3.2.3 Oscillator Investing

Two broad strategies fit this and those are Trend and Momentum investing. The methods develop trading strategies specific indicatorsa which feeds into an "oscillator" which assign a numerical value to these inputs. Trades are based on a change in these numerical values, Trend Following funds generally take a closer look at the price of the asset and momentum places more emphasis on technical indicators as inputs to the oscillator.

4.0 Real World

Due to the increasing popularity of Artificial Intelligence more and more Systematic funds being launched. Being from a more scientific background I find these quite interesting. But there will always be a place for a fundamental economic analysts whom believe that they can "see" the market clearer than a model. There are various wars on both sides shouting that systematic is better than discretionary and vice versa.