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Alternative Market Briefing

Rates aren't the only thing driving markets in Q4 O'Connor says

Monday, October 31, 2022

Bailey McCann, Opalesque New York:

Market volatility is leading to some interesting dispersions among asset classes, according to the latest update from UBS O'Connor. UBS O'Connor is the multi-strategy hedge fund arm of UBS Asset Management, a global investment manager with over $1 trillion AUM. O'Connor's just released fourth-quarter letter cautions investors not to get too invested in narratives around interest rates as they aren't the only factor influencing prices.

"Companies within the same industry have very different balance sheet structures, working capital requirements, capital expenditure commitments, hedging policies around energy, lags between higher costs and higher pricing, mechanisms they have used to pass through freight and energy cost increases, FX exposure, and so on," the letter says. "The prospect of a slowing economic backdrop has brought many of these issues to the forefront, giving our investment teams what we believe are relative value opportunities to proactively engage in."

O'Connor believes that high and persistent inflation will keep the Fed in a hawkish stance for the foreseeable future, which could make it tricky for investors in risk assets. The investment team also expects valuations to come down as well as material downgrades to forward earnings estimates.

There may also be dislocations ahead in the credit market. Economic data isn't looking very recession-y and neither are the credit markets, but O'......................

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