July in Review
August 10, 2021    Jordi Visser
July was the sixth straight positive month for the SPX, which closed up 18% YTD. Despite another positive month, there were cross currents under the surface that led to difficulties in positions related to economic growth and inflation. First, volatility (VIX) saw its first monthly increase since the GameStop chaos in January 2021. In addition, small cap stocks (the Russell 2000) had their weakest month since March of 2020 amidst the original COVID panic. It was also the worst month for small cap stocks relative to the SPX since March 2020. Despite continued strong economic and inflation data, the reflation trade, measured through the Morgan Stanley Cyclicals vs. Defensives Index, also had its worst month since March 2020. SPACs relative to the SPX saw continued weakness. This trend started in February 2021 with this month being the worst since March 2020. The IPO ETF relative to the SPX was also down sharply. All this risk reduction led to significant drops in the event driven and merger arb areas which can best be seen through the Merger Fund (MERFX) having its worst month since March 2020. These unwinds were also seen in the fixed income market as US 10-year yields saw their largest monthly basis point fall since March 2020. This move in yields was seen globally as the total amount of negatively yielding debt around the globe had its largest monthly rise since before COVID began. All these shocking moves led to the worst monthly performance for the HFRX Global Hedge Index since March 2020.
July was a frustrating month. On top of the volatility and significant divergence of security price movements from economic growth, the earnings season led to surprising moves as well. This year has been challenging for hedge funds, beginning with the Gamestop chaos, followed by Archegos in March, weakness in SPACs, merger arb, and sharp moves lower in rates, which came on the back of stronger than expected economic growth and significantly higher than expected inflation. Expectations have peaked for the 2nd derivative of growth and inflation. The delta variant and the lack of further stimulus have led to a sharp deceleration of projected growth early next year. Our PMs and analysts have not seen signs from a bottom up analysis that growth will decline significantly, so we see the recent position unwinds and lack of confidence as opportunity for the final five months of the year.
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