Systematic investing adapts to a higher-rate, more volatile market regime by prioritising robustness, defensiveness, and explainable models over optimisation.
One of the biggest changes that Vincent Berard, Head of BNP Paribas Global Markets’ Product Strategy for THEAM Quant Funds, has noted in recent years is the greater value placed by investors on having robust strategies. THEAM Quant is BNP Paribas’ quantitative investment fund platform offering systematic strategies developed by its Global Markets QIS team and implemented by BNP Paribas Asset Management. Portfolio construction in the 2010’s was less rigid and more levered according to a Reuters report last year, as interest rates stayed low, hedge funds expressed exuberance, facilitated by banks who wanted to stimulate growth after the GFC.
As we entered the 2020’s, the macro environment grew more unstable, with interest rates going from near 0 up to 4%. Berard notes that this abrupt shift challenged portfolio allocations, which had originally been built for a low-interest-rate environment. “As an illustration, many clients challenged our systematic rates trend models during 2022, by saying they wanted to see those models reduce their position as rates were already significantly up. But our models kept following the rates rise and ended up being very profitable and efficient at compensating typical portfolio bond losses. Most macro approaches had cut positions too early, and left money on the table, because of their more discretionary element.”
Suhaimi Zainul-Abidin, CEO of Quantedge Capital, a firm invested across 300 markets and several asset classes, cites a recent example where their models were challenged but navigated recent market turbulence. “When markets go south, when there’s a correction, when there’s volatility and turbulence, we will probably get hit. However, there are always things that are going to be up when the market is down”
THEAM Quant’s systematic strategies offer a range of liquidity profiles that appeal to different investors. Transparency is key: clients are provided with daily updates how the most dynamic strategies behave and position. This allows investors to reduce or increase exposure. In the case of a multi-strategy fund, a client may want to hedge parts of the strategy’s underlying positions if they believe, for example, that a long equity exposure has become too high to their individual taste or in relation to their overall portfolio. Berard believes this consistent transparency makes “a huge difference in changing regimes.”
The regime that the THEAM Quant strategies is currently navigating has seen great dispersion across equity returns. Despite broader inflationary pressures on central banks and oil maintaining its high position, the S&P 500 has performed considerably well in 2026. Berard sees the demand for a broad range of exposure “increasing significantly” from investors. This mirrors the portfolio breadth of Quantedge,“our bread and butter has always been about diversified allocation to various asset classes; as many markets as possible”, notes Zainul-Abidin.
In this context, Berrard notes that within fundamental investing many are placing less emphasis on core metrics such as balance sheet quality when allocating to equities, instead favouring portfolios with a wider range of potential outcomes and opportunities. Directional plays, defensively positioned equities, or diversifying into less concentrated sectors.
The role of defensive equities within a portfolio is something that the THEAM Quant team places great emphasis on. Berard defines this as “building portfolios with defensive mechanisms around equities.” This is typically done by using option overlays, which provide great flexibility in portfolio construction, pairing factor-based investing with downside protection, or having tail-risk protection and the opportunity for enhanced upside participation. The demand for the use of options within strategies is mirrored on the investor side, with allocation inflows increasing significantly over the past 5-10 years, according to Berard. For Zainul-Abidin, volatility is managed through “long-short market neutral strategies that act as buffer”, an area where the firm expanded significantly in recent years.
THEAM Quant’s approach means they are constantly evolving their model to try and maintain their edge. This is supported by a dedicated research team called QIS Lab, which spends time reviewing and publishing academic papers, and analysing strategy design. This key research function has also supported the team on embedding alternative data sets, such as ESG and intraday sources. For example, NLP (Natural Language Processing) has become fundamental to constructing equity strategies. NLP has the potential to analyse earnings calls, transcripts, patent filings, and corporate communications at speed and at scale. For THEAM Quant, this is helpful when building thematic strategies to analyse which stocks may provide optimal exposure to a given theme, something that an apparent surface-level analysis may not provide.
Despite the fundamental role that AI can play in the research process, Berard is yet to be convinced its usefulness can be mirrored when making investment decisions. “If an AI model says, I’m long the S&P and short gold today, clients want to understand why. If you were to say it’s because of a double hidden layer neutral network, that’s not always a satisfactory answer.” Therefore, for the THEAM Quant team, robustness and explainability remain critical across the board; Zainul-Abidin shares that sentiment. “We try to focus on strategies that have a long-term positive expected return, things that have a good justification for the trade that we intend to put in place. Once we are comfortable with the justification and theory behind it, then it’s about looking for the data to support it.”
