Moving forward to the next stage in quant-macro investing

Systematic

December 2024

• The biggest challenge in 2025 will be navigating an environment characterised by significant geopolitical and macroeconomic uncertainties
• Turning risk into an advantage involves treating volatility as an opportunity rather than merely a threat
• Significant developments in AI should allow us to identify opportunities that are less obvious to traditional statistical models

1. What do you think could be the biggest challenge or opportunity for clients in 2025?

From a macroeconomic lens, the biggest challenge for clients in 2025 will be navigating an environment characterised by significant geopolitical and macroeconomic uncertainties. The possibility of a soft landing is being challenged by factors like geopolitical tensions, changing fiscal policies, and the potential for sudden rate adjustments by central banks.

This uncertainty creates a high risk of market shocks and increased volatility, which may cause traditional portfolio diversification strategies to underperform when correlations between asset classes converge.

However, these same factors also present an opportunity for achieving significant returns in this environment. The key lies in leveraging multi-asset allocation strategies and seeking convex return profiles. For clients, the opportunity lies in moving beyond static diversification to a more dynamic, multi-asset strategy that seeks to hedge against macro-driven risks while capturing relative value opportunities in different asset classes.

2. What do you see as the one major investment opportunity for you in 2025, and how can you capitalise on it?

The important investment opportunity for 2025 lies in not missing out the most significant asset movements. Our ‘Core Macro’ strategy is specifically tailored for such an environment where we seek to ultimately benefit from any major dislocations in any major asset class by following the momentum behind it. We believe that being agnostic and making sure that we are positioned alongside the major trends will also capture the next opportunity once it arises.

Furthermore, we are working on a new set of strategies with the goal of introducing more convex characteristics to our existing system, which we hope will improve our return profile in a macro-driven and volatile environment further. Last but not least, we also plan to introduce a new set of yield harvesting strategies to complement the above. Once integrated this set will have the potential to offer a more stable return profile than more traditional carry and value-based approaches.

And last, we want to share our views on what awaits our investors for the next stage in quant investing. We expect some significant developments taking place this year on AI, especially on the causality and reasoning research. Large Language Models (LLMs) make it possible, for the first time, for quant-macro strategies to operate with a very detailed and holistic understanding of the world outside. Using this compressed representation, we argue that we will finally have a chance to move forward from traditional correlations. This will allow us to identify investment opportunities that are less obvious to traditional statistical models; for example, the potential expansion of tariffs under the Trump administration presents significant ripple effects. By utilising AI-driven causal models, we can not only anticipate these impacts for secondary markets such as emerging economies that serve as alternative suppliers or those affected by changes in currency flows, but also speculate on alternative scenarios.

If our forecasts come to life, we are committed to make sure our clients will be among the ones who will benefit from this novel approach to asset allocation as first-class citizens thanks to our long-term expertise on the topic.

3. What is the biggest risk to your asset class next year, and how can you mitigate that risk, or even turn it into an advantage?

The biggest risk in 2025 is the potential for sudden, unpredictable market regime shifts, particularly those driven by geopolitical events or abrupt fiscal policy changes. These shifts could lead to periods of extreme volatility and make some quant models vulnerable, especially those relying on historical correlations that may break down in moments of crisis.

As our models inherently take advantage of such macro shifts if those fully develop, they might also take a hit under very rapid back and forth shifts as any agnostic trend-following approach will have an embedded lag to identify and position for trends.

Turning this risk into an advantage involves treating volatility as an opportunity rather than merely a threat. We are working on a new set of strategies which could improve our reactivity to such environments. Our objective to introduce new and complementary convex strategies will have the potential to create this result. Should we deliver on our aims, some ability to tap into causal insights may allow us to maintain robust performance even in the face of macroeconomic unpredictability.

In essence, our strategy for 2025 is to embrace the risk environment by taking advantage of our proven and robust strategy set for multi-asset class allocations, while building on top of it via novel more convex, adaptive, and causally informed decisions, ensuring that our models are not just resilient to shocks but also ready to capitalise on the opportunities they present.

Dr Erk Subasi is Head of GAM Cantab and manages GAM Cantab’s quant strategies.