Inflation is one of the most important topics in 2021. The rise in inflation is all but surprising given the central bank interventions of last year. Inflation is as high as it has not been for the past ten years. However, current inflation levels are not of huge concerns, but rather what levels could be reached given unprecedented money printing since Covid-19. Consequentially, many large investors have made moves towards gold and Bitcoin (BTC). Equity markets have also rising tremendously, perhaps already incorporating potentially high inflation in the coming year(s). Figure 1 shows the inflation rate in the US since 1915. In the last 30 years, inflation was rarely higher than it is currently, but the potential of ballooning is substantial. For example, inflation is only slightly lower than it was at the peak of the financial crisis in 2008, but the interventions this time were multiple times higher than back in 2008. Alongside, the more outstanding money, debt of government has also skyrocketed, as governments had to fight the devastating economic impact Covid-19 brought. Figure 2 shows the debt to GDP ratio of most countries. Most developed economies, except the Scandinavian countries and Switzerland, have surpassed a ratio of 50%. Another substantial number of countries have even surpassed the 100% mark, e.g. the UK, the US, and France. The highest ratio is from Japan with 257%.
Hedge funds are doing great in 2021. Hedge funds’ AuM has surpassed the $3.8tn mark in March 2021, which is backed by several reasons. The more negative view on hedge funds over the last five years have subsided, since they have mitigated the financial impact of Covid-19 and posted strong performances afterwards. This boosted the AuM through the performance as well as additional inflows caused by the good results. This is very likely to continue, since hedge funds have had their best Q1 return for more than two decades. Alternative investments in general did very well. Private equity was slowed down initially by Covid-19, but their recovery returns were extremely strong. The high valuations on the stock market certainly helped to achieve this return. Private debt did well too, although their initial recovery was slower. But due to the favorable interest rates, private debt seems attractive compared to public debt. Commodities are doing well too, especially considering their relatively bad performance over the last decade. Gold gained significantly since 2019, which was further boosted by the money printing following Covid-19 and surged to a record of $2k per ounce, but since then, it lost again and has been very stable at around $1.7k over the last months. Oil, which was hit very hard during the initial Covid-19 reactions, has reached its level prior to the crisis and continues to reach higher prices. Just in the last month, WTI crude oil gained more than 10% and is currently at $66 per barrel. Industry metals also have gained substantially in 2021 and due to their demand, it is likely that this will continue. Cryptocurrencies have gained again over the last two weeks. Bitcoin (BTC) was not that specular, as remains between $50k and $60k, despite dropping quickly below the $50k mark. Nevertheless, BTC is still up 91% in 2021 and its market cap remains above $1tn. The big mover was Ethereum (ETH), which was around $2,500 before its surge starting in early May. It peaked above $3,400 and is currently at $3,350. ETH is up 349% in 2021 and almost has a market cap of $400bn. Figure 5 shows the ETH price (in green) from 2020 onwards and its value in BTC (yellow line). During 2020, the two coins moved similar, but since 2021, ETH is outperforming BTC substantially. At the end of 2020, ETH was worth less 0.03 BTC, whereas now it is worth more than 0.06 BTC per coin. Other altcoins followed ETH, but not to same extent. Thus, the crypto market, of which 70% was BTC in 2020, known as “Bitcoin dominance” is shrinking. Currently, BTC only accounts for 45% of the market capitalization of the crypto market.
Hedge funds have had their best Q1 performance in more than two decades, despite the recently negative coverage caused by the Archegos collapse and the Gamestop short squeeze. Nevertheless, these negative events have not affected the performance numbers of hedge funds to a large degree. In particular, since hedge funds delivered a good performance in 2020, while mitigating the drawdown when Covid-19 emerged. As a result, hedge funds have seen increased inflows. Figure 1 shows the returns of hedge funds over the last year. Hedge funds lost less in Q1 2020, then they did not manage to keep up with the growth of the S&P 500 during Q2 and Q3 2020. However, since then, hedge funds performed equally or better compared to the S&P 500. Our equity strategy benchmark is down slightly in March 2021, largely driven by strategies focusing on tech and healthcare, which had a stellar 2020. Other strategies that struggled in 2020 are now the key drivers of the returns. The best equity strategy is up almost 17% in 2021.
The interventions of central banks have been a major topic over the last year, aside from the surging stock markets and Covid-19. This is certainly justified, as the scale of the interventions are enormous. The common measure of lowering interest rates was not sufficient, and quantitative easing in form of money printing and purchases of treasuries went way further than the during the GFC. Figure 1 shows the liquidity injections of central banks across the world. These injections were certainly one of the core reasons why the stock markets surged to that extent. Figure 2 shows the extent of the liquidity provision of the FED during the outbreak of Covid-19 from March 1st to April 20th in 2020. Within almost a month, the FED bought bonds worth almost $2tn. These interventions caused the FED to now being the largest holder US Treasuries. As emphasized before, this development applies to many other countries, albeit to a lesser extent. In Figure 3, it shows the holders of UK gilts over the last 30 years. Starting in 2008, BoE started buying UK gilts and is now as well the largest holders of them.
Alternative Markets Update March 2021
In the current uncertainty in the markets, macroeconomic factors play an important role aside from Covid-19 and the vaccination efforts. Inflation is a major concern in 2021, even though it was very obvious in 2020 already. However, in 2020, it was completely overshadowed by Covid-19 and the tremendous surge in equity markets among others. Inflation is a concern around the world, caused by the severe interventions undertaken by central banks. In particular in the US, where the FED intervened with money printing on such a scale that it cannot be compared to any other economy. This was largely required, as conventional monetary policy was not enough, for example, lowering the interest rates to the area around 0%. Even quantitative easing could not solve the problem, even though the FED’s balance sheet ballooned. Figure 1 shows the FED’s balance sheet over the last five years. At the beginning of the crisis, the federal reserve was at around $4.3tn. In 2020, this increased by 76% to $7.3tn and is still rising in 2021. Currently, it is at almost $7.7tn. In comparison to 2008, during which the federal reserve increased by 151%, the balance sheet increased by “only” $1.3tn in absolute terms. It is important to note that during the last two decades, the FED’s balance never declined by more than 1% on an annual basis with one exception being 2018 with a decrease of 8%. Interest rates in the US have recovered quite spectacularly over the last months. Figure 2 shows the development of interest rates in major economies over the last few months. The US interest rates are higher than any other interest rate from the UK, Europe or Japan, both short- and long-term. The short-term interest rates have remained very stable, while the long-term rates have increased a lot, for example, the 10-y US treasury note is soon back at 2%.