ALTERNATIVE MARKETS UPDATE - END APRIL 2023

​In this challenging ecosystem, alternative assets showed resilience to the drawdowns in public markets. While some hedge funds have struggled in recent times, the industry is managing the current situation well. For the first time since the pandemic, hedge fund launches have reached pre-pandemic levels again. Regarding performance, in particular large hedge funds have managed the drawdowns well. Figure 2 shows a comparison of public equities and bond indices relative to equity and fixed income hedge funds. For equity strategies, hedge funds were able to mitigate the largest drawdowns of public equities, while also benefitting from the recovery periods (although not to the degree as public equities have). For fixed income strategies, the results are even better. Not only were the funds able to mitigate the drawdowns in fixed income significantly, but they also posted stronger gains in the recovery periods, at least in most instances. Private debt and private equity funds achieved similar results, although it is unknown as of yet how they did in the very short-term. Throughout 2022, private debt funds managed to return a positive performance in each quarter and enhance the stability of a portfolio substantially. Private equity strategies functioned similarly to equity hedge funds, as they mitigated most of the drawdowns of public equity, even for the riskiest sub-strategy in venture capital. Figure 3 shows a comparison of direct lending, private equity, and venture capital benchmark indices versus public equities. While these results are promising, the private equity industry has not been unfazed by the recent crisis. Fundraising became a substantial issue in Q1 2023 as well as more and more downrounds. This leads private equity funds to search for alternatives. One of which seems to be buying back its own debt, which has been more prominent in recent months. Especially in the fundraising department, private debt also saw a substantial shortage, such that pension funds and endowments make up almost 50% of the capital raised. While higher interest rates also lead to higher yields in the private debt markets, it comes at an increased risk with rising loan default rates.

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RESEARCH PERSPECTIVE VOL. 202 April 2023 Alternative Markets April 2023 The worldwide economy has experienced substantial pressure in recent times. Over the past weeks, markets have somewhat stabilized with expectations that there might be another hike ahead and no further hikes for a while. In the US, inflation has been continuously decreasing since June 2022 and is now at 5%. In Europe, the situation is similar but delayed. Inflation has only been declining since November 2022 but it decreased strongly in March 2023 to 6.9%. Equities also enjoyed the recent relief from some of the pressure and recovered most of their losses from earlier in the year. In April 2023, equities remain mostly flat with some minor gains. Oil prices have remained quite volatile in 2023. While oil was affected by the strong recession fears at the beginning of the year, its volatility remained high even when markets calmed down. This was offset by cutting the oil supply in early April 2023. Since then, Brent crude oil reclaimed the $80 per barrel mark, it had at the beginning of the year. These supply cuts could threaten the economy, as with higher oil prices, inflation could rise again. This would mean that central banks are likely to further increase interest rates. Figure 1 shows the conflicting oil needs and corresponding prices. Figure 1: Conflicting Oil Needs and Corresponding Brent Crude Prices, Source: Bloomberg Economics, April 2023 In this challenging ecosystem, alternative assets showed resilience to the drawdowns in public markets. While some hedge funds have struggled in recent times, the industry is managing the current situation well. For the first time since the pandemic, hedge fund launches have reached pre-pandemic levels again. Regarding performance, in particular large hedge funds have managed the drawdowns well. Figure 2 shows a comparison of public equities and bond indices relative to equity and fixed income hedge funds. For equity strategies, hedge funds were able to mitigate the largest drawdowns of public equities, while also benefitting from the recovery periods (although not to the degree as public equities have). For fixed income strategies, the results are even better. Not only were the funds able to mitigate the drawdowns in fixed income significantly, but they also posted stronger gains in the recovery periods, at least in most instances. Private debt and private equity funds achieved similar results, although it is unknown as of yet how they did in the very short-term. Throughout 2022, private debt funds managed to return a positive performance in each quarter and enhance the stability of a portfolio substantially. Private equity strategies functioned similarly to equity hedge funds, as they mitigated most of the drawdowns of public equity, even for the riskiest sub-strategy in venture capital. Figure 3 shows a comparison of direct lending, private equity, and venture capital benchmark indices versus public equities. While these results are promising, the private equity industry has not been unfazed by the recent crisis. Fundraising became a substantial issue in Q1 2023 as well as more and more downrounds. This leads private equity funds to search for alternatives. One of which seems to be buying back its own debt, which has been more prominent in recent months. Especially in the fundraising department, private debt also saw a substantial shortage, such that pension funds and endowments make up almost 50% of the capital raised. While higher interest rates also lead to higher yields in the private debt markets, it comes at an increased risk with rising loan default rates. Figure 2: Comparison of Public Assets and Hedge Fund Strategies (Left: S&P 500 Index vs. SMC Equity Index and HFRX Equity Index; Right: BofA Merrill Lynch US Corporate Master Index vs. SMC Fixed Income Index and HFRX Fixed Income Index), Sources: YCharts, FRED, SMC Research & HFRX, April 2023 Figure 3: Comparison of Private Debt, Private Equity, and Public Equities (S&P 500 Index vs. Direct Lending (DL), Venture Capital (VC) & Private Equity (PE) Indices), Sources: YCharts, Cliffwater & Cambridge Associates, April 2023 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). 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