An unexpectedly weak July U.S. jobs report exacerbated a multi-day global risk-asset sell off with broader impact than the SVB collapse which didn’t significantly impact the S&P 500. Heightened U.S. recession fear was particularly impactful in Japanese markets with a strengthening yen resulting in carry trade unwinding and a historic equity sell off.
The Recent Volatility In Historical Context
It’s salient to note the recent market sell off actually began last month, led by U.S. tech valuation concerns and geopolitical risks. For instance, realized U.S. index volatility has more than doubled since July, one month SPX skew in July was at a 14-month high, and correlations have been consistently rising.
Historically, U.S. election years are positive for the S&P 500, going back to 1925, though given confluences of uncertainty they can be volatile, especially in October. The impact on U.S. markets, despite the VIX spike, was relatively muted and U.S. index volatility, as of July in election years, was at the lowest levels since 1992.
Globally, the yen carry trade's importance in funding global risk assets means a more persistent sell-off cannot be ruled out currently, however markets now see the BOJ walking back their hawkish shift.
Hedge Fund Strategies Impact
The market turmoil's impact varied across global hedge fund strategies.
Long-Short Equity Strategies
Long-Short Equity strategies have been down a few percentage points on average with a greater impact on Japan focused fundamental strategies.
Systematic Equity Strategies
Rapid regime changes or spikes in volatility often cause drawdowns in these strategies. But given the much higher breadth of these strategies and improved handling of factor exposures in the recent years, most of these strategies tended to be flat or positive during the event.
CTA Strategies
Managed Futures Strategy drawdowns have been heavy, stemming primarily from equities, fixed income and credit, though exposures to markets like China or systematic equities have offset detractions despite global hard landing concerns amidst the greatest Nikkei sell off in Japan since 1987.
Discretionary Macro Strategies
The increase in volatility has benefitted macro and "long volatility" strategies, however in this instance Yen or JGB positioning may have offset this.
Event Driven Strategies
Event Driven Strategies tend to have a long bias, so a market correction usually impacts them, but in this instance they seem to have been somewhat removed from the epicenter of the crash and their focus on catalyst, credit and niche situations have protected them to a degree from the sell off.
Conclusion
Despite the recent broad based equity volatility, and historic moves in the Nikkei, the incoming economic data remains relatively solid. The unwind of the Yen carry trade continues but will end at one point. Historically U.S. election years tend to be volatile with positive outcomes.
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