Hey guys, it’s me, the new guy again. Here’s my thought process as of late: Next time if I have a sizeable amount of money, the best way to grow that money is to pay someone to grow it for me (i.e family office funds, private bankers etc.) The 1-2% management fees on top of the slight margin they take on profits is honestly not that bad, considering how much of your time it frees up. But in order to be that rich guy or family, I’m interested in first working for them, being their private banker, being that fund manager, being the one the fund manager turns to for investment decisions or outlooks, you get the gist.
And so I was researching into funds, its components, various themes, how they perform over time. And that’s where I stumbled across this fascinating discovery: Funds can have values too. And one would think that there are endless possibilities to the types of funds and financial products you can invest in, but I’ve managed to understand how they can be broken down into 3 broad categories, with all funds having 1 trait in each.
Let’s dive straight into it, before I provide some real-world examples:
1. Fundamental vs Statistical
Fundamental funds would involve investing based on one’s understanding of the cause-and-effect linkages that makes up the markets and economics machine, such as looking for undervalued equities, or bonds in regions that are likely to perform well due to its economic performance. On the other hand, statistical funds would mean investing based on statistical relationships that can change rapidly, looking for the best combination of various asset classes to generate the best risk-to-return ratio (Sharpe ratio).
2. Systematic vs Discretionary
Systematic investing involves, as its name suggests, a system, with explicit rules defined for investment decisions that can be debated and stress-tested across time, countries and environments, such as using machine learning to analyse historical trends etc.. Discretionary would be investing without explicit criteria that the above has, but it could be something like riding the Gen AI wave, or crypto boom as of recent months. It values recent performances and trends a lot more than historic performances.
3. Diversified vs Concentrated
This last category is fairly straightforward, where diversified means your risk is balanced across good, various unrelated return streams to minimize dependency on any given source, such as investing across major markets and asset classes, while concentration would be something like putting all your eggs in one basket – you can either hit the jackpot, or get knocked out of the game if you are wrong.
Confusing? Here’s some real life portfolio/fund examples that all seem pretty legit, but are made up of different values.
Example 1: A more classic, textbook fund, where machine learning is used (systematic)to generate trading strategies across 100 different markets (diversified), building a portfolio from these strategies based on the relative weight of each strategy from its historical performance in the last 40 years(statistical). This probably involves a bit of quantitative trading to generate those alphas… an area of potential research.
Example 2: Holding a portfolio of exclusively US equities and bonds (concentrated). You can determine and change the shares allocated to equities and bonds as well as whether you want to de-risk and change it to cash (discretionary), with these decisions being made based on how well you think the economy will perform (fundamental). If one day the US market crashes because of something Trump announces or war breaking out, this portfolio will just go crashing out… good luck with that. But if not, the last 6months or so have been looking great for the US market, so whoever owns this is probably doing great!
Example 3: A team of top macro investors identifying their top 10 investments in a given year (discretionary) to build a diversified portfolio of 20-40 positions across various markets (diversified) based on those recommendations. This is likely a fundamental approach to investing in its fund, with no statistical correlations involved at all in the way the fund is structured.
Learning points and takeaways!
As you can see all these fund structures out there are all either fundamental/statistical, systematic/discretionary and diversified/concentrated, even though they’re all different but very legit ways of investing in their own right. Not saying there’s a right or wrong though, some funds take on higher risks and in return give higher returns if they “guess” right, while others may be more stable but give you lower returns in a sense. While constructing these portfolios/funds, it is critical to know the investors’ risk appetite and risk preferences, before deciding how to approach the structuring of such funds, to create synergy between the funds and investors’ similar values. As for me, I’ll stick to the GenAI boom for a little while longer. Happy investing everybody! Hope this was as eye-opening for you as it was for me 🙂
Until next time,
J
Musings From The VCs 
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