Investment Committee – February 2023


Maximize Returns with Compelling Income-Generating Investments and Alternative Risk Premia Strategies

The Investment Committee of KM cube has expressed its confidence in an eventual decrease in inflation, though it remains to be seen if it will drop enough for central banks to start cutting interest rates. As discussed in previous meetings, it is important to clarify that interest rates and inflation are two separate economic concepts, and while they are related, they do not have a direct cause-and-effect relationship. There are many factors that can affect inflation, and higher interest rates alone do not guarantee that inflation will decrease.

The firm believes in remaining invested in compelling income-generating investments, and looks for mitigation in foreign exchange and interest rate volatility while anticipating some heightened volatility in equity markets. The committee favors investments in the US over Europe.

Alternative Risk Premia

Over the past thirty years, academics and practitioners have identified alternative risk premia, which refer to investment strategies that aim to capture return premiums from sources other than traditional asset classes, such as equities and bonds. These strategies target alternative sources of risk, such as volatility, carry, momentum, and other market anomalies.

KM cube is actively incorporating these alternative risk premia strategies into its offerings, recognizing the potential benefits they offer to investors. However, it is important to note that these strategies are not one-size-fits-all solutions, and their performance may vary based on market conditions. The key to successful implementation of alternative risk premia strategies lies in a thorough understanding of the underlying logic, which is rooted in academic research and analysis.

Options Market

The importance of retail activity in the financial markets was discussed extensively by the Investment Committee this month. In recent times, more and more retail investors are relying on options to gain exposure to the stock market, leading to a surge in demand for related products and services. The impact of retail traders can be seen in the 52% increase in S&P option volume in 2022, where the majority of the options traded had a time to expiration of 5 days or less.

The emergence of new technologies has made the options market more accessible, resulting in spillover effects in the market microstructure. This presents opportunities for short-term strategies, particularly intra-day, and the Investment Committee is keen on incorporating these strategies into its systematic offerings.

Dynamic Allocation Strategy

KM cube concludes that it may be optimal to not predetermine a strategy, but rather be dynamic and allocate capital where the risk-profile is periodically favorable. Corporate earnings announcements, not the statements from the Federal Reserve and ECB, will prove key to the markets this month.

Authors: John Couletsis and Kostas Metaxas