O’Connor Global Multi-Strategy Alpha Monthly Letter

For our August letter, it would be hard not to reference one of the largest spikes in the Chicago Board Options Exchange Volatility Index (VIX) that we have seen in the last ten years (as shown in Figure 1). This spike followed a significant sell-off in Japanese equities and an unwind in the Japanese yen carry trade, which triggered selling of risk assets in various systematic strategies. Occurring immediately after weaker manufacturing purchasing managers’ index (PMI) and payrolls data, there were initially fears that this was a pre-cursor to a wider recessionary market correction. However, these fears were short-lived with more reassuring subsequent data such as a strong retail sales print. Earnings have remained supportive, and corporate buybacks combined with the sell-off in volatility have provided a technical tailwind.

Figure 1: Spike in volatility expectations

Despite our view that the market overreacted to the latest payrolls data – considering that factors like weather and increased immigration contributed to the rise in unemployment – there remain some signs of weakening labor demand worth respecting. For example, the National Federation of Independent Business (NFIB) survey on the share of small businesses planning to increase their headcount continues to deteriorate, and this historically has been a leading indicator for the unemployment rate 6-months forward (as shown in Figure 2).

Figure 2: Small businesses expect to slow hiring

We believe that a mixed macroeconomic backdrop combined with uncertainty heading into US elections warrants a more cautious investing approach overall heading into September. We have continued to maintain low correlations to equity and credit markets while still generating alpha, and we are pleased with our broad-based gains across strategies as well as our overall idiosyncratic-driven performance this month in the face of rising equity and rate volatility. We continue to selectively scale up in areas like China and Latin America where positioning dynamics feel less crowded, while remaining patient in our capital deployment in areas like liquid credit.