While the fire brigade managed to keep the fallout contained, market action in August revealed the substantial risk hiding in opaque global market linkages that are highly sensitive to changes in monetary policy.

Investors de-risked portfolios in July by closing the popular long Nasdaq / short Russell 200 “pair trade” , leaving the S&P 500 with a gain on the month as sector rotation kept a lid on the VIX and hedge expense in TCM portfolios at a minimum.

While VIX is low and markets are trending higher, hedge expense is the main risk to portfolios and in these periods, a dogmatic hedging approach often costs investors more than the market declines they seek to avoid.

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For now, low VIX and tight credit spreads reflect little worry of imminent systemic stress and under such conditions, we view hedge expense as the main risk to manage with market decline risk taking precedence only once conditions turn enough to make an imminent crisis more likely.