Systematic Trading Model Outperforms

The Gavekal framework classifies the economy into four regimes: inflationary boom (high growth, high inflation), disinflationary boom (high growth, low inflation), inflationary bust (low growth, high inflation), and disinflationary bust (low growth, low inflation). This model posits that different asset classes perform better in specific economic environments, such as equities excelling during a disinflationary boom. Systematic trading operates on a predefined set of rules for identifying trends, managing risk, and executing trades, removing discretionary decision-making. This contrasts with simple trend-following, which focuses primarily on buying assets rising in price and selling those that are falling, a strategy that can be less effective in sideways markets. The model's "dual momentum" component is a two-step process. It first assesses relative momentum, comparing an asset's performance to its peers, and then checks its absolute momentum—its own past performance. If an asset isn't showing a positive trend on its own, the model may rotate into cash or another outperforming sector. This quadrant-based approach allows for tactical shifts between major asset classes like equities, bonds, cash, and gold. For example, an inflationary boom favors "scarcity" assets like real estate and commodities, while a disinflationary bust favors safe government bonds. The shift towards such models reflects a broader institutional focus on risk management beyond simple diversification. In an environment of increased macroeconomic uncertainty, large investors are prioritizing strategies that can mitigate risk during market stress and manage portfolio drawdowns.