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 an opportunity for the final five months of the year.
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