HISTORIC FIRST HALF
​Short illustration below to remind you how exceptional these last six months have been. We went from economic optimism (“Phase One” US-China trade deal) to geopolitical dynamite (Soleimani assassination) to trade wars (Saudi-Russia oil price war) to the mother-of-all curved balls: COVID. The latter killing half-a-million people (and counting), plunging the world economy into recession and triggering changes in the geopolitical and economic landscape that will last for years to come. With regards to the latter I have written about these in past editions (the rise of “localism”, the danger of the “blame-game” and “resilience over efficiency”).

JULY AND SECOND HALF PREVIEW
Three things will probably dominate. First, today’s start of Germany’s EU presidency with the focus on EU budget (MFF), recovery fund, COVID preparedness, Green Deal, China and Brexit - in that order. 

Second, the US election – with Trump becoming more erratic as his chances vanish; Biden picking his running mate and China/BigTech becoming a bipartisan punchbag. Three, COVID news on the medical and economic front. Expect the US$600-unemployment-add-on (expiry: 31-July) to be extended, but at a lower rate. Looking into Year-End, my main worry is the September/October period, when (1) the US presidential race heats up and China/EU will know about it. (2) Government pandemic-support programs globally start to taper, leading to bankruptcies, downgrades and job losses. (3) The return of colder weather and a potential 2nd wave. (4) The traditional hurricane season – since Climate Change is still happening.

Alternative Markets Update June 2020
Last week, on the highs, saw first significant equity fund inflows since first week of April, as the “cash on the sidelines” gets dragged in. with USD 4 trillion in US money market funds along and underweight equity investors aplenty, there is plenty of reluctant buyers to be dragged in.
Interestingly, the rate of change of the Fed balance sheet has collapsed over the past weeks; with the sheet only increasing by USD 4bn last week. It has been a core view of ours, that President Trump will regard the equity market as his primary scorecard for his presidency. The concept of reclosing the country, or acknowledging the virus and its implications, is being left behind by the US Administration. They will do everything they can to get stocks higher, knowing that IF Trump is voted out in November, the legacy of a record stock market he will be able to show that he left “the greatest economy ever”. So we know that US policy makers have huge firepower at their disposal to drive equity prices higher. ​

The charts below – the first shows the Fed’s balance sheet in blue plotted against the SP500  in red. The top slide shows the absolute size of the sheet, note the correlation with the SP500. The lower slide shows the week on week percentage change in the balance sheet. As can be clearly seen, the rate of change of sheet expansion has collapsed. We should never forget, that getting the US equity market, which will in turn drive all equity prices higher, is now the primary policy of the US Administration.

Alternative Markets Update May 2020
​The current crisis caused a huge spike in uncertainty. Figure 1 shows the VIX closing price and the VIX futures as measures of volatility in the market. Prior to the crisis, the index remained stable between 10 and 25. After the initial outbreak in Italy and as it began to spread rapidly, it spiked to above 70, while the futures exceeded 80 at one point. Since the spike the index has steadily declined and is now back at 30, as the virus outbreak is mostly under control now, but there is still a substantial fear of a second wave that might hit, if no vaccine is found. The scenario that a vaccine is developed prior to the possible second wave is highly unlikely, as many from health care industry claim that a vaccine will be available earliest in the late autumn and even more claiming that there will be no vaccine until 2021. The second wave however is likely to appear in autumn or if reopening measures are executed too fast.

Figure 1: Comparison of VIX Closing Price and VIX Futures Within the Last Year, Source: CBOE, May 2020

As a consequence of volatility, the gold price rose substantially. The gold price continuously increased over the last year, as visible in Figure 2. It started with the trade war between the US and China, which drove gold prices up until the virus induced crisis started, at which point it accelerated its gains. After the virus had spread in many developed countries, an unprecedented day occurred, at which all assets fell, even though the reasons were different. For gold, it was due to the fear of not enough supply being available. After this fear had perished, gold started rising significantly again, especially as the Fed and other major central Banks started printing huge amounts of money, which raises the fear of inflation. As gold is an inflation hedge, it rose even further, leading to the projection of the Bank of America that gold’s target price is $3,000.

Figure 2: Gold Performance Within the Last Year, Source: Barron's & Market Data Group, May 2020

Alternative Markets Update May 2020
The overall situation of Covid-19 is finally getting better. Most countries in Europe have started to loosen their restrictions, while many countries have already loosened their restriction multiple times. So far, the loosening of restriction has been a success, as there were mostly no increases in daily infections. In the US, the situation got better as well, but not to the level as it is in Europe. Despite the still relatively high number of infections in the US, they are loosening their restrictions too. The market fear of a second wave is very present, especially in the US. There are finally some good news in the oil market, as oil prices have stabilized and rose continuously to above $25 per barrel for crude oil. In the hedge fund industry, CTAs remain the most profitable strategy, despite the weakness of the energy sector in the current market environment. In general, April 2020 was a very good month for hedge funds, as the industry posted its best monthly performance in six years, which is largely driven by the substantial bounce back of equities, after their huge decline in March 2020. In the crypto space, the highly anticipated Bitcoin (BTC) halving took place on Monday, the 11thMay 2020. BTC started rallying upwards since the end of April, which was caused by the widely discussed upcoming halving and information that more institutional investors are looking at BTC, as a potential hedge against inflation. As a consequence, BTC rose sharply from $7,700 on 28th April to $9,300 on 30th April. During the next week it remained relatively stable, with an additional surge on 9th May, after which BTC rose above $10,000. However, just a few days prior to the halving, BTC dropped again and remains now $9,000 (as of 13th May). The impact on private equity and private debt due to the coronavirus is still uncertain, as data in these industries are available with a significant time delay. In real estate, house prices fall, especially luxury real estate.

Macro and Political Outlook May 2020 by Macro Eagle
1 – APRIL REVIEW Another month for the history books. Despite “total lock-down” and widespread economic implosion, the S&P500 (+12%) had its best month since January 1987, mainly thanks to unprecedented fiscal and monetary stimulus. This dichotomy between the real economy and financial markets reminds me of an injured soldier (economy), who while high on morphine (stimulus) keeps cracking jokes (market). The problem: morphine only gives you time … it does not solve the problem and it can have nasty side-effects. More on that below. First, the review:
Week 1: With Trump warning of up to 240,000 US casualties on April 1st, we had the worst S&P quarterly start EVER (-4.4%). The next day, oil had its largest 1-day gain EVER as Russians and Saudis started talks. The week ended with the biggest oil price gain (+32%) since 1983. Boris Johnson taken to hospital.
Week 2:  Positive Covid data in Europe and NYC trigger a 7% rally on Monday (6th). Bernie Sanders drops out of the presidential race (Wed 8th). Fed adds $2.3trn in stimulus and buys junk bonds for the first time EVER (Thu 9th). The S&P (+12%) records its best week since 1974 and technically enters a “bull market” (up 20% from the lows), ending shortest Bear Market ever. Really? That’s it? Eurogroup agrees emergency package.
Week 3: OPEC+ agrees on biggest production cut EVER (10mbd). Market rallies on positive Covid data and vaccine-hopes (Gilead’s remdesivir) despite grim IMF global growth forecasts, worst ever decline in US Retail Sales (-8.7%) and largest ever drop in US housing starts.
Week 4: WTI (oil) May future contract drops into negative territory (-$37) for the first time EVER on supply-demand technicalities. US Senate passes $500bn stimulus bill. ECB follows Fed and accepts “junk” as collateral. Trump suggests disinfectant as possible Covid cure. 
Week 5: “Re-opening” plans start the week on a positive note. But markets get hit with a new wave of negative data: US Q1 GDP -4.8% (worst since 2008), US Consumer Spending at -7.5% (biggest 1-month drop since records began in 1959) and disappointing Amazon results. It slowly dawns on markets that all might not be that well.

Hedge Funds
The hedge fund industry started with a record AuM of over $3.3tn to the year 2020. January and most of February looked promising, as the market continued its bull run of the last ten years with some minor exceptions during this time period. After covid-19 hitting Western countries, hedge funds have started to suffer. In sum, hedge funds have experienced the second worst quarter in history after Q3 2008. However, when looking at monthly returns, March 2020 exceeds the losses of any other month during the financial crisis when looking at average performance. Figure 2 shows the last 12 monthly returns and the previously worst month in the financial crisis, October 2008. As of 29th April, the AuM of hedge funds, which was higher than $3tn since 2014 dropped below this mark for the first time totalling $2.95bn. Despite the substantial inflows during January and February, the net flows within 2020 are negative now. Only relative value strategies and green funds have managed to generate net inflows this year. The performance of strategies in the hedge fund industry greatly varied, as crisis strategies, such as long volatility and tail risk are up 35% and 27% YTD, despite being the worst performing strategies in the last seven years. Equity hedge strategies, which have performed great during the last years, were hit hard, as equity long bias and long short bias are down 20% and 10% YTD. Debt funds were hit equally, as distressed debt is down 12% and fixed income is down 8% YTD. Most of the other strategies lie within a range of -10% to +5% YTD. Figure 3, and Table 1 respectively, show the returns of our indices compared to their benchmark indices.

As described previously, the majority of equity and debt strategies yielded negative results, so did our strategies with a few but notable exemptions. In equities, our market neutral US equities algo strategies is up 30.74% YTD. The remaining positive equity strategies are between +1 and +4% and focus on being long and short in US equities. However, as a whole, equity strategies are down 7.22% in March and 5.47% YTD, which compares well to the benchmarks shown in Figure 3. Our debt strategies were hit. Two out of seven strategies are slightly up in 2020, while two strategies returned substantial losses. Our debt strategies collectively performance approximately in line with benchmarks in 2020. Our tactical trading strategies performed very well in Q1 2020, as they are up 15% YTD collectively. This is exceptional, as only two of our six benchmarks are up, and those are only slightly up. The discretionary global macro strategy has realized a net return of above +50% YTD. The fund of hedge fund strategies performed around what an average hedge fund achieved in 2020 with a loss of around 8%. Our cross-asset indices, indices based on all of our strategies, are slightly down in 2020 with 2% and 3% in total.