O’Connor Global Multi-Strategy Alpha Monthly Letter
April 2024
April has been more challenging for markets as hotter than expected inflation prints have led to a re-pricing of Fed rate cuts and, in some quarters, fears of a hike. Yet against this backdrop, we see tailwinds for alpha continuing to emerge.
Capital markets vibrancy
Capital markets vibrancy
Capital markets are coming alive with day 1 IPO performance from the likes of Reddit +48.4%, Astera Labs +72.3% and Galderma +20.8%. These strong performances may signal a green light for sponsors to bring more paper to market.
Sponsor monetization: With over 5,000 sponsor portfolio companies having been held for at least five years, and 3,000 for at least seven years, there is ample opportunity for harvesting. As some checks start to get sent to LPs in the post, the pressure for other competitor GPs to catch up on distributions to LPs and transact could lead to a compression in bid-ask spreads, and more reasonable pricing in IPOs. Good performance in IPOs tends to initially be self-fulfilling at turning points like now as good performance encourages more capital to flow into the space, providing an attractive setup for our capital market related strategies.
M&A momentum
M&A momentum
Unlocking capital: This increased monetization activity could free up more capital and give more cover for Sponsors to re-engage with M&A with larger buyout funds having plentiful dry powder. M&A activity has also been cyclically depressed in the last couple of years, yet we believe that uncertainty over borrowing costs, financing and inflation is waning. Thematic trends: Corporate balance sheets are healthy and thematic trends around the likes of Energy Transition, AI, and geopolitics are driving strategic decision making in the Boardroom.
Figure 1: M&A Activity as shown through Volume and Deal Count levels
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Equity long/short strategies
Equity long/short strategies
Performance highlights: YTD performance has been broad based but particularly standout from our Equity Long/Short strategies, where nearly all the alpha is coming from our short books. While several market participants are running multi-year low exposure in their short books, we are finding opportunities in thematic, earnings driven and accounting related shorts.
Micro vs. macro dynamics
Micro vs. macro dynamics
Diverging market dynamics: To us, this market backdrop is currently much more about the micro than the macro; sustainably higher rates are bringing greater differentiation between industries and peers, and companies are diversifying capital allocation strategies.
Regional variations: Exposure to key themes like decarbonization and AI adoption varies, while different regional fiscal and supply-side policies may create desynchronized inventory cycles.
Rate volatility as measured by the MOVE index has broken back below 100 for the first time since early 2022. Intuitively this makes sense given the macro and central bank backdrop, and this also translates to investors focusing incrementally less on the dynamics around rates and inflation, and more on company level idiosyncratic opportunities and risks.
Figure 2: Rate volatility illustrated via MOVE Index
Team expansion
Team expansion
New strategies: This quarter we have some exciting changes to the team. We will be starting an EM (ex-Asia) strategy covering Latam and CEEMEA. This is a natural fit with what we do with Asia, but also should have synergies with our Energy Transition Team, Tech Team, and European L/S team among others. We have past experience in the space and see the markets as structurally more inefficient, with less competitive dynamics from other buyside peers.
Enhancing capabilities: We also will welcome to O’Connor the seven-person deep Commodities team, formerly at CSAM. This should complement our existing strategies, and structurally, we see right now to be an opportune time to add such a sub-strategy. More expensive financing, political interference, higher cost inflation and scarcer resource opportunities have all led to under-investment in supply in several areas in recent years. Meanwhile the buildout of assets for the Energy Transition and for Datacenter & AI capabilities is commodity intensive. Combined with geopolitics and what would appear to be a “higher for longer” inflationary backdrop, we anticipate greater volatility and trading opportunities in spreads.
With a keen focus on performance, innovation, and client satisfaction, we stand ready to navigate the complexities of today’s markets and unlock new opportunities for success. Join the conversation:
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Introducing our leadership team
Meet the members of the team responsible for UBS Asset Management’s strategic direction.