What are systematic allocation strategies?

Investing.com -- Systematic allocation strategies are designed to bring structure and objectivity to portfolio management by relying on models that react to data rather than emotions.

According to UBS, these strategies are meant to “replace ad-hoc and emotional decision-making with a disciplined investment process informed by large amounts of relevant data.”

By applying predefined rules and quantitative analysis, these strategies aim to reduce behavioral biases and maintain consistency, particularly during volatile markets.

There are two primary types of systematic strategies highlighted by UBS: momentum-based systematic asset allocation strategies and Commodity Trading Advisors (CTAs).

The former typically shift between equities and bonds based on changes in market outlook, while CTAs use futures to take both long and short positions across various asset classes.

Despite the name, CTAs are no longer limited to commodities but operate broadly across equities, rates, and currencies.

Both strategies depend on models that identify trends using market momentum and economic indicators. When these models detect sustained positive or negative momentum, they trigger changes in positioning.

This model-driven flexibility allows systematic strategies to capture trends that traditional static portfolios might miss.

“The result is a unique stream of returns that often behaves differently from stocks or bonds and can perform well when a conventional investment strategy falters,” UBS strategists note.

However, these strategies are not intended to outperform in every environment. They tend to lag in sideways markets or when sharp reversals follow sudden declines.

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“Such bouts of underperformance are to be expected and in no way undermine the case for adding an allocation to such strategies,” the strategists added.

UBS also notes that beyond systematic strategies, other diversification approaches such as risk parity or endowment-style allocations can also enhance portfolio resilience.

Including systematic strategies can help diversify returns and improve long-term outcomes. A simulation presented in the UBS report showed that integrating a systematic equity component into a 60/40 portfolio improved returns and resilience, particularly during deep drawdowns.

The simulation was configured for equal long-term risk and volatility to the static 60/40 portfolio.

“This approach helps manage risk and optimize returns, leading to a more resilient portfolio over time,” the report states.

Compared to traditional hedges such as puts or holding cash, systematic strategies can also offer more dynamic protection. Strategists point out that they “can provide protection similar to puts or cash buffers, but with less performance drag, by actively mitigating drawdowns and even adding returns during crises.”

In sum, systematic strategies use model-driven trend detection to adjust risk exposure and enhance portfolio resilience across market cycles.

While they may lag in choppy or rapidly reversing markets, their ability to perform during prolonged downturns makes them a valuable addition to a diversified wealth strategy—especially when investors are comfortable with the risks and illiquidity typical of alternative assets.

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