Investment Committee - April 2025

When Calm Hides Risk

The Investment Committee convened in March to evaluate current market dynamics and reassess our approach to asset allocation in light of recent volatility. The discussion extended into April, focusing on a significant theme shaping today's investing environment: the importance of understanding transactional activity flows versus relying solely on traditional methods such as fundamental analysis or technical charting. The committee explored how the structure and behavior of market participants influence market stability, particularly in times of stress.

Reframing Investment Analysis: From Fundamentals to Flows

During April’s meeting, our investment committee carried on from March to discuss how investing in our times is really about analyzing transactional activity flows; and not so much about studying fundamental data or charting technical analysis.

Differentiating Between Types of Investment Activity

Members considered the concept that all investing is not the same. Pretty much most of transactional activity is inherently stabilizing to markets. For example, purchasing stocks of undervalued firms, or providing capital to attractive offerings in the start-up universe, most of the time finds an equilibrium at or near fair values, and this evidently reduces realized volatility. These are usually unleveraged positions which do not blow up or induce short covering.

The Destabilizing Effect of Leverage

Leveraged investing is the thing that can destabilize markets during stress periods. When investors are exposed to losses larger than they can afford during a market crash they will be forced to hedge at any cost. Unfortunately, this obviously will take place during stressed market environments, when further selling is a huge pressure on markets. Forced to liquidate portfolios, many investors attempt to minimize their exposure by selling the market as it continues to drop.

The Build-up of Risk During Calm Periods

As markets stay calm for extended periods of time, leverage and tail risk selling build up. Every time. No exceptions. If you have the professional ability to keep up with such numbers you get to know about it. And with some effort you can figure out the details.

Interpreting the Recent Market Dip

Throughout this recent stock market dip, which brings equities negative for the year, we saw many indicators at extremes, a fact that can only persist if news keep getting worse. This suggests this move lower is not part of something bigger; hence the committee leans towards this actually forming a periodical bottom for stocks.

Conclusion

The March discussion marked a pivotal moment in the committee’s ongoing effort to adapt to the evolving market landscape. A key takeaway was the growing need to shift our analytical focus from static valuation frameworks to dynamic market behavior, particularly around transactional flows and leverage dynamics. While traditional tools remain useful, they may not be sufficient on their own in a world where liquidity shocks and risk positioning often dictate short-term market movements.

Looking ahead, the committee will continue to refine its models for monitoring transactional risk and leverage build-up, ensuring our portfolios remain resilient across a range of market conditions. Our working thesis—that we are near a short-term bottom—guides our near-term asset allocation while keeping an eye on any emerging macro or liquidity threats.

Authors: John Couletsis and Kostas Metaxas