Systematic Trading at a Hedge Fund

10 min read

By Chainika Thakar

With this article, you will be able to enrich yourself with the essentials of systematic trading. Find out what skills and qualifications you need for the role of a systematic trader. Moreover, to perform well at the job, you must know the responsibilities of a systematic trader which we will discuss.

This article covers:

What is Systematic Trading?

Systematic trading, also known as methodical trading, operates by trading the macroeconomic market with the help of an algorithmic trading program and is mainly used by hedge funds. Also, systematic traders make use of technical analysis of market data such as price or volume in order to detect market trends. Then, they hold positions for making profits based on the signals. With this course on quantitative portfolio management, you can learn to build your portfolio so as to generate maximum gains and manage risks.

Systematic trading implies designing trading strategies with the help of computing models so as to make the trades automatic. Delving deeper into the concept, apart from trading based on profitable trading signals, a systematic trader also takes care of:

  • Defining trade goals
  • Risk control measures and rules while trading
  • Data cleaning while dealing with new sources of data as there can be some erroneous entries as well

Furthermore, it is not that systematic trading means only fully automated practice. Systematic trading includes both manual trading as well as full or partial automation using computers. However, you can refer to this learning track on Quantra specifically designed for learning automated trading.

Okay, moving forward, let us also find out why opt for systematic trading.

Why Systematic Trading?

Systematic trading brings a lot of benefits, and thus, as a systematic trader you will be sorting out many issues at the hedge fund. We have a list of such benefits which systematic trading brings with itself, which go as follows:

  • Systematic trading helps to avoid the risks associated with human emotions
  • The fully or partially automated trading system helps to take advantage of profitable situations in the market since the automated system operates at a faster speed for recognising profitable situations and executing the trade in the same
  • Ability to backtest a trading strategy
  • Helps to manage risk of complex portfolios efficiently

Systematic trading helps to avoid the risks associated with human emotions

As a manual trader, there are several emotions that may hamper decision making in trading. For instance, during the volatility in the market, a fearful emotion makes the trader overwhelmed. Thus, the trader ends making a decision based on fear and not on a rational approach. But once a trading strategy is in place, this kind of risk can be mitigated. A trading strategy is automated and hence, the decision making is all rational and not emotional.

Automated trading system helps to take advantage of profitable situations in the market

Yet another advantage is that the automated trading system can find out the most profitable situations even if they occur in short time intervals. The system can buy and sell orders automatically via the trading platform throughout the live trading. Faster execution of the trading orders reduces the chances of missing out on a trade because of guessing. For instance, the trading system can run on one-minute bars of a stock which is an easy job for the automated trading system.

Ability to backtest a trading strategy

With systematic trading, there is a possibility to test the strategies on historical data. This is known as backtesting the trading strategy which tells you how the strategy would have performed in the past. Thus, it gives an idea about strategy’s performance in the current situation or the live market. Although it does not guarantee the results in the future, backtesting the strategy provides you with an evaluation of potential strategies. This way the strategies which do not seem to be performing well in the market can be eliminated.

Now, let us find out the types of systematic trading strategies next.

Types of Systematic Trading Strategies

A systematic trader uses the trading strategies especially for overcoming the volatile times in the market. During the volatile times, there is an outburst of fear or panic in which the systematic trading strategy can save the investor with the help of its non-emotional decision making. These strategies are not very different from general strategies. The only benefit is that the strategies are automated via algorithms to make the most rational decision and safeguard the investors from a volatile market.

Some of the common types of trading strategies which can be adopted by a systematic trader at a hedge fund are:

  • Momentum trading
  • Pair trading
  • Hidden Markov model
  • Cash futures arbitrage
  • News-based automated trading

Momentum trading

The main goal of a momentum trading strategy is to buy when there are short term uptrends and sell or short whenever the stocks start to lose momentum (start to show downtrends or have reached the peak).

With the systematic trading approach, the algorithms are created to decide the most beneficial time to enter the market, the holding period and also the exiting time.

Hence, the algorithm does it all and makes sure that the volatility does not impact the investor negatively. The risks of moving into a position too early, exiting late or missing the beneficial moments of investing get mitigated with the help of the automated process.

Moreover, you can learn everything about momentum trading strategies from this course.

Pair trading

In the case of pair trading, the long position and short position of two highly correlated stocks are matched. Presence of high correlation is a must for the strategy to be beneficial. This strategy is beneficial when there is a discrepancy in the correlation.

Pairs trading is also known as statistical arbitrage trading. You can refer to this course for learning the same and create trading models using Python as well as backtest the strategy on commodities market data.

The algorithms in systematic trading make sure that they find out when the correlation begins to falter. Hence, in case the underperforming asset regains value, it will be beneficial to take a long position in it. On the other hand, the outperforming asset’s price may start going down in which case the investor must short the asset. Systematic trading helps by automating the process.

Hidden Markov model

Hidden Markov model, also known as the Regime machine model, can be deployed for beneficial trading.

Markov analysis is a model which is utilized for forecasting the value of a variable of which the predicted value is based on the current position and not any historical performance. Hence, an investor can predict the probability of a stock going up tomorrow in the market if it went up today.

With the help of systematic trading, the predictability of the stock value can be automated for a specific number of days for beneficial trading.

Cash futures arbitrage

This strategy takes advantage of the difference between the spot price and the future price of the stock. This implies that the investor can sell the futures which has been quoted at a premium currently and can buy an equivalent quantity of stocks but at a lesser price. This way, the difference between the two will be profit.

Systematic trading can help with this strategy as the automated algorithm can predict the best time to buy or sell both currently and in the future.

News-based automated trading

This is an advanced automated trading strategy which works on the basis of news of the financial market scenario. In news-based trading, the sentiment of the news is used for estimating the stock price movements.

Also, you can learn about trading strategies with news and tweets in the course here.

Hence, the investor can trade once he/she comes to know about the possible stock return.

You can also find out a deeper perspective on the basis of trading styles and categories of systematic trading strategies in the video below:

Also, you should read through the Primer on Quant Strategies for a better understanding. Okay, we will move forward and will find out the difference between systematic trading and discretionary trading.

Systematic Trading vs Discretionary Trading

Although we have a comprehensive article here for you to understand the difference between systematic trading and discretionary trading in detail, here you can find the points in brief:

Systematic Trading

  • The trading decision in the market depends on various things like programming, the study of historical data, backtesting, risk management and forecasting the market performance. Then an algorithm is formed for entering and exiting the market.
  • In systematic trading, there is no risk of the trading decision getting influenced by the emotions since the algorithms are based on a set of logical instructions.
  • No monitoring of the market charts is required in systematic trading. The information is fed into the system and decisions are made automatically in accordance with the best possible result.
  • The rules are predefined and fed to the system via algorithms created. The rules also depend on backtesting the historical data which increases the successful results.
  • The success of trades depends on the backtesting of the strategy on the historical data. The trades are placed at predefined levels and are navigated by the algorithms.
  • Sentiment analysis and such methods help the trader remain in a beneficial position while trading. Algorithms are designed to read the fluctuations in the markets and take logical decisions.

Discretionary Trading

  • The strategy and trading decision is derived from learning charts, market conditions, indicative signals and such related factors. The entry and exit in and from the market then take place.
  • There is a risk of traders becoming prone to emotional factors at times, especially during volatility in the market. The traders may become gripped by fear, greed etc. which results in significant losses.
  • The traders do not base their decisions on machines and the next best decision is decided manually.
  • There are no predefined rules on the basis of which the trading decision takes place. The decisions are made on the basis of experience of the trader on the basis of study over the years and multiple executions.
  • With a sudden fluctuation in the market, a trader may make impulsive decisions and lead to losses. The losses are incurred because of the inability to assess the situation because of fear.

Next, we will discuss the skills and preferred qualifications for becoming a systematic trader.

Skills and Preferred Qualifications for Becoming a Systematic Trader

In some hedge funds, the requirement of the systematic trader comes with a list of qualifications and skills which are expected. Let us discuss the qualifications and skills required.


Bachelor's Degree in:

  • Science,
  • Technology,
  • Engineering or
  • Mathematics


  • Quantitative research perception
  • Ability to deal with uncertainty and tweak the actions accordingly
  • Operational leadership
  • Keen interest in trading and algorithmic approach to trading
  • Problem-solving attitude and strategic decision making

Further, let us find out in some simple steps as to how you can become a systematic trader.

How to Become a Systematic Trader?

For becoming a systematic trader, you should invest your time and efforts in the following:

  • Training
  • Books
  • Trading knowledge
  • Understanding the workflow


Training, for which you can join an organization as a trainee or an intern so as to get familiarized with the work process and ethics.

You can also opt for online courses. Here are some online courses you can opt from.


Books play an essential role since they can be your best guide for starting with algorithmic trading. Read about all the essential books may need in your wonderful endeavour here.

Trading knowledge

Also, you must have trading knowledge. For starting with algorithmic trading, you must have the knowledge of:

  • types of trading instruments (stocks, options, currencies etc.),
  • types of strategies (Trend Following, Mean Reversal etc.),
  • arbitrage opportunities,
  • options pricing models, and
  • risk management

To know more about starting with algorithmic trading, you can refer to the blog here.

Understanding the workflow

The practical workflow of systematic trading involves the following:

  • Strategy formulation
  • Coding the strategy in a computer language such as Python
  • Backtesting the strategy
  • Making the strategy live

For a detailed read into the workflow, refer to the blog here. In order to become a systematic trader, you can also learn systematic trading strategies from our EPAT programme. For getting started with systematic trading, you can try Blueshift.

Now, let us also discuss the roles and responsibilities of a systematic trader.

Roles and Responsibilities

There are several roles and responsibilities a systematic trader needs to perform each day for effective results and best trading practices. These roles and responsibilities include the following:

  • Checking current news regularly in order to ascertain potential risk and strategic profit or loss.
  • Working with new sources of data for maintaining accuracy.
  • Data cleaning practice so as to remove erroneous entries from the new data.
  • Creating codes in a computer programming language such as Python, C++ etc. for making new strategies.
  • Developing new trading strategies which would be beneficial to the investors. For making sure of the success of the strategy, a systematic trader needs to backtest the same thoroughly.
  • Researching the new ideas so as to develop them into strategies.

A usual day for a systematic trader

Moreover, a lot of traders prefer to live close to the workplace (within a 30–40 min commute), as they have to be at the desk early. For example, a trader based in London trading the European markets, needs to be at the desk at least at 7- 7:30 AM, before the European open at 8 AM UK time.

This gives enough time to do your preparation for the rest of the day, which we discuss next.

Preparation for the day ahead includes all the research and analysis about what had happened in the world overnight and if there are going to be any key data release that day.

For example, if you are an interest rates trader, then you need to be on top of any developments or statements by the central banks and any key data release like the non-farm payrolls (US jobs data) in the day ahead. Apart from this you need to take account of your overnight positions and how you plan to add, cut down or hedge them. Quant traders might have to see how they need to tweak the parameters of the models.

Then comes the opening session which is a fairly busy time and might last for two-three hours (say from 8–12 AM) depending on the market. There are some good opportunities to build some new positions or cut down on some existing ones.

Again the markets get busy during the closing time and you and/or your algos are on it! During all the sessions you keep an eye on the PnL/risk and make sure that you trade within your limits and the mandate of the firm/desk. At the end of the day, you again take account of your positions again and hedge your exposures if required.

Alright! As we have reached the end of the article let us also take a look at the conclusion.


This article aimed to take you through the important topics related to systematic trading. We discussed several aspects of a systematic trading starting from the what and why. Systematic trading is a profession that is meant to make trading automated for the ease of the investors. There are some easy steps to begin systematic trading with Quantra’s course and Blueshift helps once you are ready to start with systematic trading.

Disclaimer: All data and information provided in this article are for informational purposes only. QuantInsti® makes no representations as to accuracy, completeness, currentness, suitability, or validity of any information in this article and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis.