Why we don’t trade headlines: Systematic investors rely on core risk controls

Geopolitical shocks can move emerging markets quickly—but trading the headlines is notoriously difficult to execute consistently. In this article, we explain why geopolitics is better treated as a risk-management input than an alpha source in systematic emerging markets, and outline the controls we use to stay disciplined through volatility.

As quantitative investors, we focus on the use of signals to guide our investment decisions. Our systematic investing approach has a history of discovering, adapting, and implementing new ways to build robust portfolios that use risk controls—both basic and complex—to keep portfolios focused on the areas where we have skill. While wars, trade sanctions, and elections do move markets, geopolitics is not an area of focus for systematic managers. Geopolitical events, by their very nature, are often random, almost always difficult to predict, and have uncertain payoffs in financial markets. History can offer a guide, but as is said about history—it rhymes, but rarely repeats.

How a systematic investment analysis differs

At its core, systematic investing is built on the foundation of historical evidence, economic rationale, and rigorous testing. For a factor to be included in a model—whether it is value, momentum, or quality—it must be tested over decades of data to ensure statistical significance and infer some degree of future persistence.

Risk management versus alpha generation

Put simply, “alpha” is the ability to beat the market. Systematic investors rarely believe they can gain an alpha edge by predicting the outcome of events better than other types of investors. Instead, they focus on risk management to attempt to reduce downside impacts in areas where one does not have skill or believes the investment returns are lopsided or inconsistent. Systematic investors often lump geopolitics into the “other” category— including various idiosyncratic elements that couldn’t have been known ahead of time (company scandals, natural disasters, etc.). Focus on your skill—and then use a belt and suspenders approach (diversification, use of risk models, and simple exposure limits to country, stock, etc.) to avoid the areas that interfere with implementing your core focus.

By focusing on factors that can be measured, tested, and evaluated, we seek to capture more persistent areas of market inefficiency and prioritize robustness.

Sometimes signals—and risk models—aren’t enough

We live in a volatile world—which seems to be getting more so over time. As we strive to be good stewards of our client assets, sometimes and thankfully rarely, we do need to make some adjustments when there are clear signs that the alpha or risk models may be missing something really important. There is no rigid playbook for these situations, as no event is the same. The examples below highlight several recent volatility episodes and how we analyzed these events to manage client capital responsibly.

Tariff tantrums

The 2025 tariff tantrums represented a new shock, driven by the imposition of sweeping tariffs by the US administration against its trading partners. Unlike some prior geopolitical flare ups, the episode was global in scope, with the potential for country-level winners and losers. Volatility and dispersion surged as markets were repeatedly whipsawed by abrupt tariff escalations and emergency policy pauses announced via presidential decree. Against this backdrop of uncertainty, one factor remained consistent: sharply higher trading costs and dramatic changes in market action as the policy began to shift rapidly. Trying to time these events was not going to yield positive results. Careful trading and steady implementation guided our approach. In short, we stayed the course.

Russia’s invasion of Ukraine

Russian geopolitical risk was not new to emerging market investors. It had been an element to some degree since the end of the Cold War. In light of these circumstances, in early 2022, we approached Russia through a formal risk-management lens. Our experienced Systematic Equity team was not comfortable accepting additional (net) purchases into the market, despite the alpha signal. We constrained incremental risk taking, maintained exposures within our predefined country risk bands, and relied on scenario analysis to balance tail-risk protection.

Capital controls

For Emerging Market (EM) investors, capital controls—measures that restrict getting your investments returned in a timely manner—are a well understood risk that periodically pops up. A recent example occurred in Egypt in 2024 (and not for the first time), when the central bank imposed significant foreign exchange (FX) controls. In that case, the portfolio team weighed the potential alpha opportunity created by heightened uncertainty against the risks of currency illiquidity and volatility. The decision was made to avoid additional trading in Egypt until the situation was resolved.

What are we doing now? For the moment, we are staying to our positioning. The risks of the Iran conflict will increase the longer they go on, but for the moment are more affecting positioning and sentiment versus the real economy. There are some signs and lots of anecdotes about impacts, but these can bring a lot of noise. We are not yet seeing major reversal in overall EM fundamentals that would otherwise be missed by our signals or risk controls. One advantage of systematic portfolios is that they often have defensive characteristics, which can absorb some of the initial shocks in short-term events.

Current emerging market portfolio positioning

From a large cap perspective, our opportunities are most compelling in areas where valuations have begun to disconnect from improving fundamentals. In China, we favor Industrials—particularly construction machinery and heavy transportation equipment—where market expectations remain muted despite early signs of sentiment turning more positive. While quality across the space is uneven, selective positioning allows us to concentrate in businesses with improving operating momentum and balance sheet resilience. We also see attractive opportunities within Financials across Korea, Mexico, Taiwan, and the UAE. In these markets, discounted valuations are increasingly supported by healthier sentiment and improving earnings dynamics, though outcomes remain highly market specific, reinforcing the importance of a focused and disciplined approach. Finally, within Information Technology, Korea stands out as a particularly fertile hunting ground, offering select companies that combine strong quality and sentiment characteristics with valuations that remain compelling relative to global peers.

From a small cap perspective, Industrials continue to stand out in China, as well as in Saudi Arabia and the UAE, where positive sentiment and attractive valuations create a supportive backdrop, with quality serving as a key differentiator between winners and laggards. In Information Technology, Taiwan is especially attractive—most notably across semiconductors and electronic components—where pockets of high quality businesses benefit from solid sentiment while valuations remain a central consideration.

In terms of regional impact, we believe both Saudi and the UAE have substantial assets to cushion both the market and economic volatility, including the capacity to rebuild and repair.

Systematically navigating EM uncertainty

Geopolitical developments will continue to create sharp, headline-driven moves in emerging markets, but we do not view forecasting outcomes as a durable source of alpha. Instead, our goal is to keep portfolios anchored in tested signals and robust risk controls—while reserving discretion for the rare moments when market events or geopolitical risks move outside what our models can reasonably capture. In our view, that combination of process and pragmatism is the most repeatable way to navigate uncertainty on behalf of institutional investors.