Financial markets are experiencing tremendous daily volatility amid an unprosperous outlook across the board. This is largely caused by the still increasing inflation, steep and continuous interest rates hikes and the ongoing war between the Ukraine and Russia. Outstanding bonds have substantially decreased in prices in 2022 so far and there is little hope that this is going to get better. For example, in the U.S., the Fed just recently started to increase interest rates to an interval between 0.75% and 1%. It is now widely expected that this interval will be increased by 0.5% in each of the following two meetings in June and July 2022. However, it is also being debated if the hikes could even reach 0.75%, if the inflation outlook should worsen. The latest inflation update did not help matters either, as the expected inflation was lower than the actual value. At the moment, U.S. inflation is at 8.3%, just slightly below the March’s numbers of 8.5%. When looking at the inflation level across the world, it is still increasing in most countries. Although inflation is low in China, it increased substantially from 1.5% to 2.1% in April. In the Euro area, inflation has now reached a level of 7.5%. The ECB told earlier in the year that interest rate hikes are unlikely to occur before the latter part of H2 2022. Currently, there are strong signals that ECB will begin raising its interest rates in July. This grim outlook has led to substantial sell-off of treasuries. Meanwhile, the 10-year U.S. Treasury has surpassed the 3% mark in early May. Aside from rising interest rates, central banks are planning to shrink their balance sheet, which will put further pressure on equities and the market in general. Equities have further suffered in May, even after one of the worst months in April 2022. In particular, technology stocks have substantially decreased, as they have been inflated the most since the central bank interventions following Covid-19. The Nasdaq Composite Index is down already 25% since the beginning of 2022. Figure 1 shows a comparison of the current tech valuation compared to their historical average. ​

​Markets are continuing to struggle in 2022. Equity markets have suffered substantial losses after their stellar 2021 caused by a combination of inflation, (expected) interest rate hikes and the Russia-Ukraine war. After the strong selloff at the end of April 2022 which closed the worst monthly performance since the financial crisis, equity indices are down substantially. The S&P500 is down almost 14% YTD while the tech-driven Nasdaq index is down more than 21%. The development of the S&P500 since January 2021 is shown in Figure 1 below. After its record high from the end of 2021, the index is as low as one year ago. Although equities are still high from a historical perspective, the anticipated, and very likely, interest rate hikes from the Fed are on the horizon. It is anticipated that the Fed will increase rates by 0.5% in May and possibly another 0.5% in June. This has a substantial impact on still highly valued stocks which will put further pressure on equities. Central banks are feeling the consequences of their extensive interventions during Covid-19. It led to record inflation levels (at least of the last 40 years), and the imminent treat of recession if interest rates are increased. Nonetheless, if interest rates are not increased, inflation could spiral out of control, if it has not already. Given that inflation has reached 8.5% in the US and 7.4% in Europe, the necessity to intervene is obvious. These difficult times are another opportunity for hedge funds to prove their worth, as they have since Covid-19. Despite losses of the industry collectively during Q1 2022, the industry still sees continued inflows. The difficulties from the uncertainties at the current moment make hedge fund selection more important, as the gap between good and bad hedge funds widened. Given the current market situation, equity-neutral, global macro and commodity-based strategies achieved great results. In particular our Discretionary Global Macro strategy had a phenomenal month with a gain of more than 50% in March and a gain of almost 150% in Q1 2022. Our crypto- and equity strategies did well in March 2022 and could partially offset their loss from earlier in the year. Nonetheless, this is unlikely to continue in April, due to the selloff in both markets at the end of the month. Another great alternative to be partially shielded to current market volatility is private equity and venture capital. Although both markets benefitted greatly from the overheated public markets in the past two years, valuations have declined slightly. Regardless of the decline in valuations, there is still a huge interest in the space as money keeps flowing in and the deal activity is very high in the space. The large amount of capital in the space alongside the competition are also likely to prevent such large decreases as the public equity markets see currently. Both of these markets, hedge funds and private equity, are large drivers of alternative markets. According to research from Goldman Sachs and Preqin, the AuM will significantly increase, even in a suboptimal ecosystem. In a grey-sky scenario, they expect the industry to grow to $14tn in 2026, up from $10tn in 2021. In a more favourable blue-sky scenario, they expect the AuM to rise to $31tn in the same time frame. Figures 2 and 3 show their findings.

​While the war in the Ukraine is going on with little progress towards peace, market participants are waiting for further moves from central banks and their announced interest rate hikes to combat inflation. Over the past months, the war had a substantial impact on the currency market, as the Russian Rubel has strongly appreciated against the US-Dollar since the invasion of Russia in the Ukraine. USD-RUB has stabilized at around 80RUB per USD, the same as it has been ahead of the crisis. This is remarkable as it spiked to more than 130 RUB/USD due to the severe sanctions imposed onto Russia. Figure 1 shows the development of RUB-USD since the start of 2022. Despite the sanctions of Russia and its currency, Russia can still control its currency well. They create artificial demand of the Rubel through different measures. For example, foreigners invested in Russia cannot sell their Rubels, they require European countries to pay Russian gas in Rubels, and they require Russian exporters to be paid to 80% of their income in Rubels. These measures all help appreciating the currency against the depreciation pressure from the sanctions. The role of the USD in the FX remains very important, as 88% of the FX transaction involve the USD as one of the currency pairs. It is also crucial in reserves for central banks as it makes up 59% in all currency reserves. This high relevance seems excessive given that it is only responsible for 25% of the world’s GDP. Nonetheless, these are consequences of a currency that is widely regarded as the world currency. An overview of this is shown in Figure 2. This is in particular relevant as for the first time sovereign currency reserves have been confiscated. This may lead central banks to diversify their reserves, increasing the relevance of other major currencies, emerging currencies and real assets, in particular gold. Gold has rallied since the initial threats were looming on the invasion of the Ukraine. It spiked at $2,052 per barrel but did not manage to hold onto this level. As the initial volatility faded, gold fell and is remaining between $1,940 and $1,980 per barrel. Figure 3 shows a summary of this development. Oil experienced substantial volatility, largely due to the invasion of Russia and Russia being a key supplier of oil. Oil started gaining since December 2021, when WTI crude was $70 per barrel. Amid geopolitical tensions and then the looming threat of the invasion, it rose to around $90 per barrel and spiked to $105 immediately once Russia effectively invaded the Ukraine. Since then, WTI rallied between $95 and $120 and has almost fallen to its lowest level since the invasion at $94 per barrel for WTI. Figure 4 summarizes this development. A similar development was observed in Brent crude, as it fell below the $100 mark for the second time only since the start of the invasion. Unlike oil, natural gas has risen to a 15-year high of $6.534 per MMBtu (metric million British terminal units), which poses a huge concern for Europe, as they are highly dependent on Russia’s gas. If Russia would decide to stop gas deliveries to European countries, this would cause a huge recession, as gas-dependent industries likely have to shut down operations very quickly. This is the case, as there are a lot more alternatives for the import of oil than there is for gas.

​Aside from the continuous news about the ongoing war between Russia and the Ukraine, macro events are increasing after they have been halted when the war started. Central banks will increase the interest rates gradually over the year to combat the steadily rising inflation. After Powell announced at the beginning of the year that there will be many, but small, interest rate hikes in 2022, equity markets lost substantially. The first interest rate hike was expected early on but was postponed and again when the war started. Even though the war is ongoing, in mid-March 2022, the Fed announced the first 25bps hike. In a statement a week later, Powell showed a more aggressive stance to get inflation under control by outlining the plan of six further 25bps hikes in 2022, which will take place after each meeting. For May, he outlined that there is a high chance that the hike may even be 50bps. Figure 1 summarizes the expectations of the interest hikes in the coming year. These planned hikes pose a major treat for an inversion of the yield curve, as the spread between 2y and 10y notes dropped to only 13bps as of last week. On Monday, the 28th March 2022, the yield curve inverted as the yield on the 5-year notes rose above the yield of the 30-year note. In all prior Fed tightening cycles since 2000, the yield curve inverted. This is particularly relevant, as this was just the first of planned seven hikes this year and the decline in the spread between short- and long-term rates has rarely been that quick. As a sign of a recession, it remains to be seen whether this scenario unfolds against Powell’s view of a flourishing economy, due to increased interest rates. Figure 2 shows the previous yield curve inversions since 2000. Increased interest rates also increase the attractivity of bonds, as they will generate returns again. Since Covid-19 when interest rates were basically zero at all times, attractivity of bonds substantially decreased which led to soaring equity market as bonds were no longer viable alternatives. It also fuelled the commodity rally, as bonds did not provide an alternative to manage inflation concerns. This led to many commodities reaching all-time highs at some points since Covid-19 emerged. The interventions of central banks to mitigate the economic effects of Covid-19 have caused an extreme situation and most macro variables are at record levels, or at least at a record level of a long timespan, as shown in Figure 3. Inflation is the major concern for central banks in 2022, as, for example, inflation reached 7.9% in the US in February. Europe is not doing much better, especially given the context of steep increases months later than in the US. While the ECB is holding interest rates for at least until the latter half of 2022, the BoE has increased interest rates three times already in 2022. The latest hike came in mid-March 2022 and was the third consecutive meeting in which interest rates were raised by 25bps each which results in rates of 0.75%. This also makes the BoE the first central bank to set its interest rate to pre-Covid levels. Now, the tone in terms of a tightening policy has been reduced to balance the impact of inflation and the economy, especially because of the soaring gas and oil prices from the Russia-Ukraine conflict. Figure 4 shows a summary of the CPIs of the UK over the past year and emphasizes the steep increase in most measures. The BoE also adjusted its forecast upwards to an average inflation of 8% in Q2 2022.

​Russia’s invasion of the Ukraine certainly did not work as planned by Russia. They vastly underestimated the resilience of the Ukrainian people and the worldwide support they have received which included money, weapons, ammunition and even soldiers among others. The sanctions imposed by most countries also have hit Russia hard which supposedly is on the brink of defaulting. Russia has suffered substantial losses in the war and Putin had to impose severe measures to shield the Russian people from worldwide news coverage. The Russian government imposed a new law for news broadcasting which made nearly all international news stations leave the country. Moreover, Russia banned many Western internet companies similarly to China. Russians are facing the dire consequences of the war, as the country is starting to run out of certain goods as well as seeing significant price increases. Nonetheless, for Ukrainians the situation is even worse, as there have been more than 1,500 civilian casualties and more than three million already left the country. Due to the resilience of the Ukrainians and the sanctions from the West, it is questionable for how long the war can continue, as Putin is likely to face more pressure from the citizens of Russia. This leads to a dangerous situation, as Putin and Russia are likely to lose substantially even if they manage to take control of Ukraine. Putin threatened the use of nuclear warheads if the worldwide interventions should continue or the NATO would step in. This threat is especially concerning, if Russia’s defeat should become apparent, even from Russia’s perspective in which case Putin has “nothing to lose”. Amplified by the war, inflation is continuing to rise. In the US, inflation rose to 7.9% in February 2022, while Europe’s inflation increased to 5.8% and 5.5% in the United Kingdom. In order to combat this development, central banks started to raise interest rates this year. The Bank of England announced its second interest raise, while the Fed announced its first interest rate hike of 2022. Both banks are expected to increase interest rate several times in 2022. Oppositely, the ECB announced that there is still space before an interest rate hike is necessary and first interest rate hikes are expected in the latter part of 2022. Figure 1 shows a summary of several assets and their performance in 2022 which strongly differs across the assets. Top performers are commodities. Crude oil is up 35% in 2022 after being up more 65% earlier in March. Crude oil topped $130 per barrel at one point in March 2022 but substantially declined in value, as it was announced that supply will be increased. Since then, crude oil is hovering between $95 and $110 per barrel. Agriculture funds also gained substantially. Wheat was a major contributor to this development, as wheat doubled from the prices one year ago. Since its peak in March 2022, the asset lost around 10-15% in value. Gold is another asset that surged and regained its losses from the past year and is close to its previous all-time high from August 2020. Figure 2 shows a summary of the performance of selected commodities. Most profitable were the commodities that are reliant on the Ukraine and Russia. Russia is a key player in oil, gas and palladium, while the Ukraine is a large supplier of wheat. These assets have skyrocketed, while other commodities still increased but only slightly. Although the increases in gold and copper seem underwhelming, both assets are trading at record or close to record highs. Equities are a lot more volatile and the broad markets suffered a substantial loss once the war started and keep declining at a relatively stable pace. Nonetheless, the success is largely dependent on the industry. Unsurprisingly, energy stocks are doing incredibly well, as they are up 32% in 2022. Tech stocks face substantially more issues and are down almost 20% in 2022 so far. This development stems from the correction of the huge gains in 2020 and 2021 and their high upside potential which is great if the economy is stable. If the economy faces a lot of uncertainty, these stocks suffer most, as is evident in the current situation. Lastly, Bitcoin (BTC) that is frequently referred to as digital gold could not maintain this status, as it is down significantly since the start of the war. It experienced substantially more volatility than most other assets during this time. Since the first few days in 2022, BTC is continuously trading between -5% to -25% compared to the value at the beginning of 2022. The industry gained a couple of percentages following the EU parliament’s approval of a crypto legislation but quickly lost this gain again. Nonetheless, the asset class is well positioned in the current ecosystem, as inflation is still rising and institutional adoption has increased a lot. Currently, 99% of transactions in BTC are from institutions. The performance of cryptocurrencies currently largely favours the big and well-known cryptocurrencies. BTC and Ethereum (ETH) have lost relatively little over this time period, whereas many other smaller cryptocurrencies, e.g. Solana (SOL), dropped by more than 50% since the beginning of the year. This highly uncertain ecosystem also favours hedge funds. The AuM of the industry soared to a record $4.8tn at the end of 2021 and it is unlikely that interest will decline. In particular, macro hedge funds are posting huge gains and attract further capital. Additionally, due to volatility, more investors deciding to put money in hedge funds rather than stocks and bonds.

The war in the Ukraine caused by the Russian invasion is the dominant topic around the world. In particular Western states widely underestimated Putin and the likelihood of the Russian invasion. Initial rumours anticipated an invasion from Russia on Monday, 14th February 2022, as Russian troops supposedly retreated. After the invasion did not take place then, there were some signs of relief, which were short-lived. Fears started to grow when Putin acknowledged the separatists in the Eastern Ukraine, more specifically, Donetsk and Luhansk. There were crucial similarities compared to the annexation of the Crimea peninsula in 2014. While this was going on, Western countries threatened Russia with sanctions. Those did not achieve a meaningful impact, as on Thursday morning, the worst case in that situation occurred. Russia invaded the Ukraine from all angles and managed to shutdown their missile defences almost immediately. Russia conquered several parts of the Ukraine extremely quickly and found itself soon on the doors of the capitol, Kyiv. Later that day, sanctions on Russia were imposed by the US, the UK, the G7 states and most other European countries. These included freezing the assets of some of Russian elites, some banks and businesses in the respective countries. This sanctions prohibit being involved in any kind of business with those individuals, banks or businesses. The US also banned individuals from trading Russian sovereign debt. Those sanctions had little impact on the invasion of Russia. Most people hoped the sanctions would be harsher, but at that point Europe was reluctant on banning Russia from SWIFT due to their reliance on Russia’s oil and gas. The invasion truly changed into a war in the city of Kyiv and over time most countries around the world support the Ukraine with additional weapons and ammunition, while some countries even sent soldiers to help defending the country. On Monday, the SWIFT ban from some Russian banks was announced as well as the extension of listed targets and institutions whose assets are frozen. Initially, Russia’s goal was to de-weaponize the country and to replace Zelensky, the prime minister of the Ukraine, by a more pro-Russian government. Russia employed substantial propaganda and legitimized the invasion by calling the Ukraine being full of Nazis among other things. It now seems very questionable whether replacing the government was the initial target, as it feels much more like a full annexation. This puts in particular the Baltic states into a state of alert, as if Putin’s goal to recreate the former Soviet Union, then they are likely the next target. This also explains the harsh threats from Russia when discussions were held whether Finland should become a NATO state. Further unpleasant developments are that China can be considered neutral towards Russia’s actions, as they first supported the Russian invasion given the reasons from Russia. However, they also followed through on Zelensky’s call to talk to Putin on possibilities to resolve this war. After an initial discussion between the Ukraine and Russia was denied by the Ukraine, it seems to be likely that Putin and Zelensky agreed to a meeting. This comes after Russia’s threat of using nuclear warheads. Unsurprisingly, markets reacted with tremendous volatility over the past two weeks. The sanctions on Russia had a detrimental effect on Russia’s economy. The Russian Rubel collapsed by 30% after Western countries announced the SWIFT ban for some Russian banks, after the Rubel has already lost substantially in value since the start of the invasion, as shown in Figure 1. Russia’s equity market also took a huge hit. On the day of the invasion, the MOEX Russia Index dropped by almost 50% from 3,200 down to 1,700. Despite its recovery, it is questionable how Russian equities will perform in the short-term future, as further sanctions are likely and make doing business outside Russia very difficult.