Alternative Markets Outlook 2020

*|MC_PREVIEW_TEXT|*

RESEARCH PERSPECTIVE VOL.125 February 2020 Alternative Markets Outlook 2020 Hedge Funds The hedge fund industry realized its highest gains of the decade, with an average return of more than 9%. Figure 1 shows the distribution of our hedge fund strategies, of which more than half of the strategies exceed a return of 10%. As the strategies performed differently across strategies in Q4 2019, it is interesting to have a look at figure 2, in which is shown, how the different strategies performed compared to their benchmarks. The redemption trend continues but the amount redeemed continuously declined. However, investments in the industry also declines. Overall more redemptions than investments were offset by an organic growth of around 9%, resulting more or less at the same AUM as at the end of 2018. For 2020, we assume, that these trends continue. Investors may expect lower returns than previously, as the industry was unable to meet expectations in most years of the decade. Now, as equity markets are at record highs, it is unlikely that it continues raising at similar pace. As a consequence, we assume that there is a shift in strategies within the industry. This is further supported by the increased interest of Investors in ESG, which is rarely incorporated in the industry. Pensions funds are likely being more interest in hedge funds, as interest rates remain at a very low level. Along with the shift in strategies, the pressure on the industry is tense, as the standard 2-20 fees are lowered more and more. We do see a tendency in the market with the highest quality managers with constant outperformance to be able to charge higher fees than 2-20 and attracting most of the capital inflows into the industry. Furthermore, there are so many funds, whereas only few manage the main stake of the AUM of the industry, implicating a consolidation trend And focus on developed manager outperform the benchmarks. With the good results in private markets, it is likely that cash is moved towards the private equity and debt industry, as the profit expectations of the hedge fund industry is likely to decline. Figure 1: Distribution of Performance of Stone Mountain Capital (SMC) Hedge Fund Strategies in 4Q2019, Source: Stone Mountain Capital Research Figure 2: 2019 Hedge Fund Performance of Stone Mountain Capital (SMC) Strategies compared with Benchmarks, Source: Stone Mountain Capital Research Cryptocurrencies Since the peak in 2017 and crypto winter in 2018, cryptocurrencies were more stable, especially in 2019. Bitcoin almost doubled its value during the year, while most other currencies remained at the same level. The expectation of cryptocurrencies in 2019 prognosticated a positive development, including higher values and usage in the real world. However, as this development was true, it was much slower than anticipated. For 2020, it is assumed that cryptocurrencies are getting more important. The most anticipated development of 2020 is the increased acceptance, which was also forecasted for 2019 already. The acceptance of these assets are slower than expected. Cryptocurrencies, and Bitcoin in particular, are increasingly seen as alternatives to gold, further supported by the currently high price of gold, which is on its way to reach the prices during the financial crisis of 2008. Moreover, two independent surveys found that 94% of clients of asset managers and endowment funds have invested in digital assets. However, the increased commitment of institutional investors should not be valued too high, as the risky nature of the assets holds them back. Further inflows can be expected from emerging markets, which face the danger of hyperinflation, as cryptocurrencies can be used to store their value. The trustworthiness is higher than ever, as progessively more financial product, such as futures, options, funds security tokens (STOs) involving cryptocurrencies are launched. Nonetheless, this also mitigates a huge benefit of cryptocurrencies, as their independence of the financial market is reduced through these products. Another significant downside is the counterparty risk, because the last two years were relatively stable and investors got used to used low default rates. If there is a huge event this year, it may lead to defaults as well as a huge loss of trust, which was gained in the last two years. Many exchanges were launched in the recent past. These are expected to consolidate, as well as a reduction in the number of existing currencies. Bitcoin is expected to behave similarly as in 2019, but never fall as low as $3,500, which is the lowest value of 2019. Infrastructure regarding cryptocurrency like exchanges, custody, decentralised applications (DeFi) for lending and derivates markets for cryptocurrencies will all try to satisfy increased investor demand combined with structural effects like the Bitcoin halving of the mining benefit in May 2020. Prices may surpass the peak of 2017. Stablecoins like Libra are also expected to rise in volume during 2020, as they are backed by baskets of fiat currency or commodities and thereby grant more security. The adoption of cryptocurrency in the real world has huge potential as well like its implementation in China and in the US and UK and recent comments of the respective central bank governors demonstrates. In that area, Ripple and Thether are the most promissing currencies with launches of Libra and the JPMCoin expected on the corporate side and government coins from China, US, and UK. Private Equity The private equity industry is at another height. While the market capitalisation reached its record 2018 and fell down slightly in 2019, the fundraising developed similarly. Only the available dry powder reached a record high in 2019. For 2020, we assume that the industry will remain at the current level. There are several reasons for this prediction, as the arguments contradict each other. The trend towards the private market compared to the public market is undeniable, as observable by the yearly launched IPOs. In 1999, 486 companies went public, whereas in 2018 only 190 did so. This trend is further supported by the fact that private equity has less observable volatility compared to public equity. Hence, public equity faces more market risk and as the equity market developed rapidly in H2 2019, a decline or a less steep increase is anticipated, reducing its profitability. Due to the record level of the dry powder, the industry awaits commitment and can offset a possible decline of new capital. We expect that venture capital backed-buyouts are increasing, along with a further consolidation of the industry. However, private equity-backed companies are considered as overvalued, which is also the reason for the decline in volume, which started in H2 2019, as the buyers are not ready to pay as much as the sellers demand. Towards the elections in the US, it is assumed that the industry will face a slowdown, caused by the uncertainty during that period. In summary, we expect that the industry at the current level and the valuation will continue to be relatively high with a small decline in 2020. Private Debt Private debt will hold its position and grow further in 2020, as the market environment has been similar in the recent years and these political risks are taken into account already. There is a strong demand in private debt, as public markets are valued at a high level and private markets grant some protection, in case the public market crashes. Due to the interest rate cuts in 2019, oftentimes, the rate shift towards a fixed interest rate model to prevent losses through further interest rate cuts. The industry also has assembled a dry powder close to its peak level of 2018. This availability of capital also causes a major concern, aside from an economic crisis, as the high amount of available capital increases the pressure on the industry to deploy in an already competitive lending market. It is likely that valuations and leverage will raise along with loosened terms around covenant-lite or covenant-less lending. Real Estate 2019 was a good year for the real estate industry, as interest rates are really low, making real estate more attractive. This development won't change during 2020. The general trends of demographics and urbanisation will remain during 2020. The market is similar to the start of 2019, while being more stable, due to lower uncertainties and tensions in the beginning of 2020. Furthermore, mortgage rates remain low, boosting the housing market even more. In general, many investors are concerned about the availability of assets. In order to reduce this concern, Berlin for example, issued a rent freeze for the next 5 years. Moreover, people are concerned about raising construction costs. In the US, the housing construction fell to the lowest value of built houses per person in the decade. Despite a record low of unemployment, the issue of this development is mainly caused by the unavailability of labor and land. In the European market, it is assumed that the market will evolve sideways due to the concerns. The UK started to recover from the loss in value, as a consequence of the high uncertainty in recent years around the Brexit vote. We expected that the industry will rise during 2020, with a potential fall again at the end of 2020, depending on the progress with the negotiation with the EU about the trade agreement. In the residential real estate market, there is trend towards smart housing, which is the increased technology demanded by residents. STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). In private assets, we advise 10+ sponsors and general partners across private equity, venture capital, private credit, real estate, capital relief trades (CRT) by structuring funding vehicles, rating advisory and private placements. As per 13th December 2019, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 55.8 billion in hedge funds and private assets. US$ 43.3 billion is mandated in hedge fund AuM and US$ 12.5 billion in private assets (private equity / private debt / real estate) and corporate finance. Stone Mountain Capital has arranged new capital commitments of US$ 1.56 billion across hedge fund, private asset and corporate finance mandates and has been awarded over 30 industry awards for research, structuring and placement of alternative investments.   Our Team   Our Solutions   Our Mandates   Our Research   Our News     Contact We are able to source any specific alternative investment search and maintain relationships with dozens of best-in-class hedge fund managers, private equity and private debt general partners (GPs) and real estate and infrastructure developers. We don’t pass any costs on to our investors, since our compensation comes from our mandated managers, GPs and developers. Please contact us, should you require further information about our solutions.   Schedule a call with the team We have updated our privacy policy to take into account the new requirements of the GDPR. Please take some time to read the policy, which explains what personal data we collect, why we collect it, how we use it and other relevant information. You can review our privacy policy here, our anti-bribery policy here and our commitment to the UK stewardship code here. Stone Mountain Capital LTD is registered (Reference: ZA589246) in the data protection public register of the Information Commissioner's Office ('ICO') in the United Kingdom. No action is required if you wish to remain in contact, however please reply if you want your details removed by contacting us at info@stonemountain-capital.com or by using the unsubscribe button below. In case this newsletter has been forwarded to you and you want to subscribe, please click here. Stone Mountain Capital is a limited company (LTD) registered in England & Wales with registered number 8763463. The registered address is: One Mayfair Place, Devonshire House, Mayfair, London W1J 8AJ, England, United Kingdom. Stone Mountain Capital LTD is registered (FRN: 729609) as Appointed Representative with the Financial Conduct Authority (‘FCA’) in the United Kingdom. Stone Mountain Capital LTD is the Distributor of foreign collective investment schemes distributed to qualified investors in Switzerland. Certain of those foreign collective investment schemes are represented by First Independent Fund Services LTD, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (‘FINMA') as Swiss Representative of foreign collective investment schemes pursuant to Art 13 para 2 let. h in the Federal Act on Collective Investment Schemes (CISA). Stone Mountain Capital LTD conducts securities related activities in the U.S. pursuant to a Securities and Exchange Commission ('SEC') Rule 15a-6 Agreement with Crito Capital LLC, a U.S. SEC registered broker-dealer, and member of Financial Industry Regulatory Authority (‘FINRA’), Securities Investor Protection Corporation (‘SIPC’) and Municipal Securities Rulemaking Board (‘MSRB'). Stone Mountain Capital FZE is registered at: Business Center, Al Shmookh Building, Umm Al Quwain Free Zone, Umm Al Quwain, United Arab Emirates. All information in this perspective including research is classified as minor acceptable non-monetary benefits ('MNMB') in accordance with article 11(5)(a) of the MiFID Delegated Directive (EU) 2017/593 and FCA COBS 2.3A.19. Copyright © 2020 Stone Mountain Capital LTD. All rights reserved. Any business communication, sent by or on behalf of Stone Mountain Capital LTD or one of its affiliated firms or other entities (together "Stone Mountain"), is confidential and may be privileged or otherwise protected. This e-mail message is for information purposes only, it is not a recommendation, advice, offer or solicitation to buy or sell a product or service nor an official confirmation of any transaction. It is directed at persons who are professionals and is not intended for retail customer use. This e-mail message and any attachments are for the sole use of the intended recipient(s). Our LTD accepts no liability for the content of this email, or for the consequences of any actions taken on the basis of the information provided, unless that information is subsequently confirmed in writing. Any views or opinions presented in this email are solely those of the author and do not necessarily represent those of the limited company. Any unauthorised review, use, disclosure or distribution is prohibited. If you are not the intended recipient, please notify the sender by reply e-mail and destroy all copies of the original message and any attachments. By replying to this e-mail, you consent to Stone Mountain monitoring the content of any e-mails you send to or receive from Stone Mountain. Stone Mountain is not liable for any opinions expressed by the sender where this is a non-business e-mail. Emails are not secure and cannot be guaranteed to be error free. Anyone who communicates with us by email is taken to accept these risks. This message is subject to our terms at our Disclaimer.