alternative markets outlook 2021

Alternative Markets Outlook 2021
The year 2020 was dominated by Covid-19 and this is likely to continue in 2021, hopefully to a lesser degree with the vaccination programs running. Two major impacts, which can affect 2021 substantially are the effectiveness of the vaccination against certain mutations of the virus that emerge more and more. While Pfizer/ BioNTech stated that their vaccine is likely to effectively protect against the UK mutation, J&J said that their trial results do not effectively protect against the South African and Brazilian variant. The second major aspect around Covid-19 in 2021 addresses the production quantity of the vaccines and when a critical mass of immunization in countries is reached. The fight from central banks against the economic damage caused by Covid-19 is likely to continue, although not nearly with the same numbers as in 2020. Interest rates are likely to remain close to zero with a tendency of higher interest rates with a long-time horizon. Despite the great performance of gold in 2020, it underperformed since reaching its peak in August 2020, mostly remaining at the $1,850 per ounce level and in 2021 so far, it dropped below $1,700, despite frequent projections for gold of around $2,500 up to $3,000 per ounce in 2021. It remains to be seen whether gold can reach this level. Gold has seen a lot of inflows during 2020, in particular in ETFs, but has also faced redemptions for reallocation towards well-performing equities and its digital alternative Bitcoin (BTC). Another important factor for gold is whether the anticipated inflation emerges or not. Another seemingly unhealthy development is the deviation from stock prices and the real results of the economy. This development can be explained partly by the tremendous money printing in 2020, as this cash needs to be deployed somewhere and bonds with zero percent interest are no alternative anymore.

​Hedge Funds
The last two years were exceptional for hedge funds. In 2019, hedge funds achieved a return of 9%, the best return in the decade back then. 2020 was even better with an average return of approximately 17%. Figure 1 shows the returns over the last three years of the flagship funds of the top-earning managers. Across all years, there were huge deviations in their yearly performance results. In 2019, the returns fluctuated between 10% up to 60% returns. In 2020, the returns shifted in an ever more positive direction, as the lowest return was 14%, whereas the highest achieved return is 76%. In comparison, the average of our strategies returned 68% this year and Figure 2 shows a distribution of returns of our strategies. 2019 and in particular 2020 has helped the industry to be in demand again, after rough years before, as hedge funds managed to reduce the downside risks of the Covid-19 crisis but also performed well in the bull run after the initial dip. Due to the increased demand on hedge funds that emerged in 2020, it is likely that the AuM of the industry will increase quite substantially in 2021, especially if equity markets should continue to perform as well as they are doing currently. This would boost the AuM of the industry both by net inflows and by the intrinsic growth through performance of funds. The institutional demand is driven mostly by the performance in 2020 and the expected market volatility in 2021.

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RESEARCH PERSPECTIVE VOL. 149 February 2021 Alternative Markets Outlook 2021 The year 2020 was dominated by Covid-19 and this is likely to continue in 2021, hopefully to a lesser degree with the vaccination programs running. Two major impacts, which can affect 2021 substantially are the effectiveness of the vaccination against certain mutations of the virus that emerge more and more. While Pfizer/ BioNTech stated that their vaccine is likely to effectively protect against the UK mutation, J&J said that their trial results do not effectively protect against the South African and Brazilian variant. The second major aspect around Covid-19 in 2021 addresses the production quantity of the vaccines and when a critical mass of immunization in countries is reached. The fight from central banks against the economic damage caused by Covid-19 is likely to continue, although not nearly with the same numbers as in 2020. Interest rates are likely to remain close to zero with a tendency of higher interest rates with a long-time horizon. Despite the great performance of gold in 2020, it underperformed since reaching its peak in August 2020, mostly remaining at the $1,850 per ounce level and in 2021 so far, it dropped below $1,700, despite frequent projections for gold of around $2,500 up to $3,000 per ounce in 2021. It remains to be seen whether gold can reach this level. Gold has seen a lot of inflows during 2020, in particular in ETFs, but has also faced redemptions for reallocation towards well-performing equities and its digital alternative Bitcoin (BTC). Another important factor for gold is whether the anticipated inflation emerges or not. Another seemingly unhealthy development is the deviation from stock prices and the real results of the economy. This development can be explained partly by the tremendous money printing in 2020, as this cash needs to be deployed somewhere and bonds with zero percent interest are no alternative anymore.   Hedge Funds The last two years were exceptional for hedge funds. In 2019, hedge funds achieved a return of 9%, the best return in the decade back then. 2020 was even better with an average return of approximately 17%. Figure 1 shows the returns over the last three years of the flagship funds of the top-earning managers. Across all years, there were huge deviations in their yearly performance results. In 2019, the returns fluctuated between 10% up to 60% returns. In 2020, the returns shifted in an ever more positive direction, as the lowest return was 14%, whereas the highest achieved return is 76%. In comparison, the average of our strategies returned 68% this year and Figure 2 shows a distribution of returns of our strategies. 2019 and in particular 2020 has helped the industry to be in demand again, after rough years before, as hedge funds managed to reduce the downside risks of the Covid-19 crisis but also performed well in the bull run after the initial dip. Due to the increased demand on hedge funds that emerged in 2020, it is likely that the AuM of the industry will increase quite substantially in 2021, especially if equity markets should continue to perform as well as they are doing currently. This would boost the AuM of the industry both by net inflows and by the intrinsic growth through performance of funds. The institutional demand is driven mostly by the performance in 2020 and the expected market volatility in 2021. Figure 1: Returns of Flagship Funds by Top-Earning Managers from 2018 to 2020, Source: Bloomberg, February 2021 Figure 2: Distribution of Returns of SMC’s Hedge Funds Strategies, Source: Stone Mountain Capital Research, February 2021 Cryptocurrencies / Blockchain Cryptocurrencies did extremely well in 2020 with Bitcoin (BTC) being up around 400% and Ethereum (ETH) around 700% from their respective March 2020 lows. Nevertheless, this extreme price spike that started in December 2020 has not slowed down in the slightest. BTC is already trading at around $56k and ETH crossed the $2k mark for the first time on 20th February 2021. BTC’s price development in 2021 is shown in Figure 3. It started the year at $29k and has already almost doubled in less than two months. Its market capitalization now exceeds $1tn. Figure 4 shows a comparison of the market capitalization of BTC and ETH to the market cap of the largest banks. Despite being a few days old, the Figure seems already outdated, as the market cap of BTC is currently $1.05tn and ETH is at $226bn. The outlook of cryptocurrencies in 2021 is very uncertain, although it is highly expected that BTC will reach the $100k mark, as suggested by its halvening pricing method of the stock-to-flow model shown in Figure 5. BTC in particular has attracted huge inflows from wealthy individuals and institutional investors around the globe and is now mostly seen as valid asset class. Furthermore, companies are making moves to buy BTC as well, as Tesla did and causing a $5k price spike within minutes. In spite of these developments, such a rapid growth is certainly unhealthy, and the entire development needs to be viewed with caution. Although if a crash occurs, it is unlikely that the damage will be equal as in 2018 but it still could have a major impact. In particular altcoins should be viewed with caution, as there does not pass a day, in which one cryptocurrency surges by 100%, which should certainly be a red flag. One example is Binance Coin (BNB), which traded consistently at $40 during January 2021 and rose to $335 during February. Despite its significant drop during the last day to $250, it is currently the third most valuable cryptocurrency with a market cap of $39bn. Other notable moves address decentralized finance (DeFi), which is expected to grow similarly as in 2020, during which its locked value rose from a few hundred million to $30bn at the end of 2020. Figure 3: Bitcoin Price Development in 2021, Source: CoinMarketCap, February 2021 Figure 4: Comparison of Market Capitalization of Cryptocurrencies and Banks, Source: Companies Market Cap, February 2021 Figure 5: Bitcoin Price Targets According to Stock-to-Flow Projection, Source: Pantera Capital, February 2021 Private Equity / Venture Capital Private equity and private debt will suffer from the same problem in 2021. After 2020, both asset classes sit on a record amount of dry powder, fuelled by new inflows and the lack of conducting business (especially early during the pandemic). This causes some pressure to commit capital and can lead to high competition between interesting investment projects, in particular as valuations are (for the most part) at very high levels. The outlook for private equity is a bit better than for private debt, as the industry AuM grew by 6% to $4.7tn and is likely to continue more inflows, especially from Asia. Within private equity, there are significant differences among strategies, buyout-based strategies had a rough 2020 and it will continue in 2021 albeit to a lesser degree. Venture capital (VC) had by far its in 2020 including a very good performance, which likely to cause increased demand.   Private Debt Private debt has had more difficulties in 2020 than private equity but also managed to increase its AuM to $887bn. Covid-19’s impact on the industry was mostly short-term oriented and is likely to form a beneficial ecosystem for the industry. Global interest rates are close to or below zero in most countries and this is expected to remain in the foreseeable future, despite the currently rapidly rising interest rates of long-term US bonds. The industry had issues with fundraising in 2020 with being down 10% from the previous year. It is expected that fundraising will increase again in 2021, in particular in the strategies around distressed debt and special situations. This is largely due to arising opportunities in the market, caused by the financial aid of governments that helped keep businesses alive. Once those aids run out, it is likely to see a surge in defaults. Moreover, the industry sees increased allocations from Asia, similar as for private equity. The industry has seen a trend of consolidation towards larger funds, which mostly hit their fundraising goal in 2020, whereas smaller funds struggled to amass enough capital. This trend is expected to continue, although it is likely that smaller funds will be better off in 2021 compared to 2020.   Real Estate Real estate certainly struggled the most among alternative assets, as Covid-19 and the governmental restrictions, e.g. the imposed lockdowns, were most severe for real estate compared to the previous asset classes. Despite the unfavourable economic conditions, the industry managed to grow by 5% in AuM in 2020. However, as of June 2020, it was the only asset class whose returns suffered substantially and went negative (-1.4%). Fundraising was also hit severely, as it dropped from $179bn in 2019 to only $118bn in 2020. In real estate, it largely depends on the type of real estate. Logistics for example, has performed well in 2020 and has prosperous outlook for 2021, due to the surge in online retailing, which requires place to store. Tourism-related real estate suffered tremendously in 2020 and it is unlikely to get better until at least summer 2021, more likely autumn or winter 2021, when Covid-19 is hopefully not such a big deal anymore when a critical mass of immunizations through either vaccinations or having had the virus has been reached. The industry additionally faces challenges in deploying its record amount of dry powder. This is caused by the scarcity of good investment and their respective valuations as well as the continuing uncertainty on the development of Covid-19. STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). In private assets, we advise 10+ sponsors and general partners across private equity, venture capital, private credit, real estate, capital relief trades (CRT) by structuring funding vehicles, rating advisory and private placements. As of 16th February 2021, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 60.3 billion. US$ 47.6 billion is mandated in hedge funds and US$ 12.7 billion in private assets and corporate finance (private equity, venture capital, private debt, real estate, fintech). 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