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Evaluation of systematic trading programs.

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This paper is intended as a non-technical overview of the issues I found valuable in evaluation of systematic trading programs both as a systematic trader and as a large, institutional investor, having looked at numerous, diverse managers in this space on a global basis over the years. Not having been able to find similar material in one source elsewhere when I began research of systematic trading managers, I hope that other investors will become more informed about opportunities and risks of the space that is too often poorly understood.


While technical education can be helpful, it is not in my view required to make a high-quality allocation decision. Rather, a process for learning about and evaluating issues relevant to systematic trading, particularly those that are unique to this investment universe, are key. Additional references are listed as necessary to allow the reader to engage in deeper research. Some of the topics discussed below apply to discretionary traders and all types of investment organizations though the focus will always remain on systematic trading.

Throughout this paper, I assume that systematic trading refers to an investment program for exchange listed instruments or spot FX that generates signals, manages positions, and executes applicable orders via an automated, previously programmed process with little or no human interference.  The list of topics is not by any means exhaustive, but it should be sufficient to allow an investor to start on the path towards successful allocations with systematic trading managers.  As I hope will become clear over the course of this paper, systematic trading is a highly unique field with its own set of advantages over other investment approaches that investors should not overlook.

The paper is structured as follows.  In Part I, I discuss the value proposition of systematic trading that ensures it a unique niche among available investment options. In Part 2, I then proceed to discuss key areas of evaluation of systematic trading programs: intellectual framework, signal generation, risk management, backtesting, evaluation of live performance, technology, and operational structure. Part 3 includes my concluding remarks and references.

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