Stone Mountain Capital - Alternative Investment Advisory Solutions - Research

Alternative Markets Outlook H2 2019 and Macro Outlook August 2019

13/8/2019

Alternative Markets Outlook H2 2019

The asset management industry experienced significant declines in 2018. Alternative assets achieved the best performance among non traditional long asset classes. The popularity of actively managed assets is decreasing for the last 15 years, while passive solutions and alternatives are gaining more attention, which is likely to continue. It is expected that the industry will experience more volatile markets, increased competition and more economic uncertainty. Especially the uncertainties will increase, for example how the US-Chinese trade war will develop, with the background of new elections in the US in 2020. Europe's uncertainty will peak on how Brexit is executed at the end of October.

Hedge Funds

Hedge funds remain strong in July after a very profitable H1 2019 and reached a new record level of market capitalization of $3.273tn. In July, hedge funds yielded positive results again. The aggregated average performance of hedge in the current year is at 7.67%, which is likely to continue. Figure 1 shows the performance of several hedge fund strategies. Noteworthy is that none of them generated negative return. The interest rate cut of the FED is likely to increase the attractiveness of hedge funds further.

Investors are currently moving cash from equity strategies to lower beta strategies, as equity markets have reached all-time highs. For H1 2019, targeted strategies were mostly credit multi-strategy and relative value arbitrage strategies. However, this shifted to macro, CTA, currency and commodity funds in July 2019 and is likely to continue during H2 2019. Despite the trade war between the US and China, the allocated capital from hedge funds in China increased further. This conflict is likely to shape the general performance of financial markets, especially in the hedge fund industry. Due to current and expected interest rate decisions from most central banks as well as the volatility of currencies, hedge funds are looking for safe havens. Gold is experiencing an increased demand, causing the price per ounce to rise to the highest level since 2016 and $1600 or even $2000 is forecasted from major US investment banks.

Figure 1: Performance of Different Hedge Fund Strategies from June 2018 to June 2019: August 2019, Source: FundMap

Alternative Markets Update H1 2019

30/7/2019

Alternative Markets Update H1 2019

Hedge Funds
After the difficulties for hedge funds in 2018, 2019 started strong, despite the current uncertainties, such as the Brexit, the European elections and the trade war. Only in May, there were some difficulties. This short downturn was offset and more than compensated in June, which yielded extraordinary results. Our best performing strategy was the cryptocurrency strategy, followed by US equity disruptive technology and US equity high conviction. The best performing asset class was tactical trading, which achieved a 30.78% YTD, as shown in figure 1. Furthermore, all strategies had positive return in H1 2019.

Figure 1: Overview of Performance of Different Hedge Fund Strategies: June 2019, Source: Stone Mountain Capital Research

Alternative Markets Update July 2019

12/7/2019

Alternative Markets Update July 2019

Hedge funds have achieved their best half year within the last decade, despite the controversies about hedge funds in the last year. Hedge funds overall have gained 5.7% since January 2019. Especially the month June was profitable, as hedge fund managers achieved a performance of 1.82%, which originates from a strong equity market. As of the beginning of July, only the long volatility strategy yielded negative returns, while the equity long bias strategy realized the highest gain with 10.56% in 2019 as per the Eurekahedge report below.

Figure 1: Hedge Fund Strategy Return Map, Source: Eurekahedge July 2019

Alternative Markets Update - Macro And Political Outlook June 2019

13/6/2019

Alternative Markets Update June 2019

June started in a more dynamic fashion for hedges funds are already recouped May’s losses. The anticipation of an interest rate cut this year as a result of Fed’s announcements resulted to a strong bounce back for equity markets. Equity hedge strategies profited the most during the first weeks of June, a month that so far is characterised by the trade war discussions and further tariff plans from US. Macro and CTA strategies had their bets right so far this month and they are waiting to capitalise on future volatility events. Bitcoin’s momentum slowed down in June and its price has receded from $8,740 to $7,900, reaching a market cap of $140bn. Ethereum had also a

slightly negative month so far and is keep following the same pattern as bitcoin.

Macro and Political Outlook June 2019 MacroEagle

Source: MacroEagle

Alternative Markets Update II Q1 2019

29/4/2019

Alternative Markets Update Q1 2019

Hedge Funds

Bad performance, pressure for lower fees and redemption constituted the environment that hedge funds faced as they were entering 2019. Despite the negativity in the industry, hedge funds proved themselves resilient and posted their best quarterly performance in a decade. Rally in equity markets was the main driver of the strong performance, but their reluctance to take full long positions in equities led to relative underperformance. Equity strategies are the biggest winners across the different strategies according to data from Preqin with CTAs starting to perform in March after a very disappointing start.

Although investors continued redeeming from the asset class, the assets under management in the industry rose mainly from capital gains and according to HFR, they reached to almost $3.2 trillion globally. Investors are trying to diversify their hedge fund portfolio exposure by region, sector and strategy.

Figure 1. Hedge Fund Strategies Performance 1Q2019, Source: Preqin

Our in-house strategies followed a same pattern during the first quarter of the year, with three out of our top five managers being US Equity focused funds. The manager that invests in high conviction ideas of carefully selected hedge fund managers is enjoying a very strong quarter followed by a US equity strategy focussed on TMT, helthcare and consumer sectors with specific interest in innovation and disruptive technologies. The recent rally in cryptocurrencies led our active altcoin manager to strong performance during February and March, bringing the strategy in our top five table for the first time since 2017. Our activist strategy suffered in March, despite a really strong performance on its underlying portfolio during January and February. Finally, our discretionary global macro strategy had one of its best months ever since inception posting an astonishing +15.27%, mainly from running long duration positions in the US, Australia and New Zealand and mixed duration positioning in Europe, complemented by bond auction trading gains.

Table 1. In-House Strategies Performance 1Q2019, Source: Stone Mountain Capital Research

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Alternative Markets Outlook H2 2019 and Macro Outlook August 2019

Alternative Markets Update H1 2019

Alternative Markets Update July 2019

Alternative Markets Update - Macro And Political Outlook June 2019

Alternative Markets Update II Q1 2019

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