Our philosophy is based on the understanding that the capital that flows in and out of securities, currencies, and commodities is the only force affecting prices that we are observing in the market.
Capital flow is the ultimate transmission mechanism between fundamentals, investor sentiment, and asset valuations.
Liquidity conditions and market volatility are inherently intertwined. When liquidity is pulled from the market (Lehman 2008, Flash crash 2010), or when there is insufficient liquidity in the market to satisfy rebalancing needs (US credit rating downgrade 2011), volatility spikes and markets suffer what is known as a risk episode. This is when the majority of investment portfolios suffer losses.
The need for protection against such events is universal. Most protection schemes available in the marketplace focus on volatility-linked portfolios, which are largely based on derivative securities.
To us, volatility is a byproduct—a consequence of decreased liquidity. The product we have created addresses the cause of the problem, rather than its symptom. Short liquidity bets are made by monitoring the capital flows that are the most visible and predictable during risk episodes and the ensuing turbulence.
We do not utilize derivatives. Thus, during calmer markets, we do not anticipate losses caused by the declining time-value of money in the derivatives portfolio, also known as Theta.
Models based on fundamentals and investor sentiment help to enhance returns during calmer markets. The capital is redistributed between two approaches based on the prevailing market liquidity regime.
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