alternative markets update end september 2021

The most noteworthy event in September 2021 was probably the apparent collapse of Evergrande, one of the largest real estate companies in China, whose status is currently unknown. On Thursday, 16th September 2021, Evergrande issued a statement that it will not be able to repay the outstanding interest payments that day. Following this announcement, the financial market was in substantial stress. Equity markets all around the world lost a few percentage points and volatility spiked. Bond trading was under pressure as well, as Evergrande’s bonds were downgraded and frozen from trading. It sometimes was already referred to the next “Lehman Brothers” case.  The volatility the stock has seen since is tremendous, as it lost nearly 80% in the first few days after the announcement. It seemed as though the situation had stabilized, but since not all due payments were paid on Friday, 24th September 2021, the status is unknown. If nothing else happens, which is highly unlikely, the company would enter a grace period following bankruptcy. There are three critical features involved in Evergrande. Firstly, China and Chinese people are heavily engaged with the company, as the company has sold many buildings already without having built them yet. A default would cause huge issues for the affected people. Secondly, many companies are frequently doing business with Evergrande, in particular construction, design and other suppliers, could also face bankruptcy alongside Evergrande. Lastly, the collapse of Evergrande would pose a substantial risk to the financial system of China. The latter one is in particular difficult, as the company has outstanding debt at more than 250 banks, which could put additional pressure on China’s ability to offer cheap debt, which is necessary to maintain growth level. Moreover, it does not make a China a more appealing place to invest for foreign investors, which were already on the decline since the recent developments

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RESEARCH PERSPECTIVE VOL. 164 September 2021 Alternative Markets Update September 2021 The most noteworthy event in September 2021 was probably the apparent collapse of Evergrande, one of the largest real estate companies in China, whose status is currently unknown. On Thursday, 16th September 2021, Evergrande issued a statement that it will not be able to repay the outstanding interest payments that day. Following this announcement, the financial market was in substantial stress. Equity markets all around the world lost a few percentage points and volatility spiked. Bond trading was under pressure as well, as Evergrande’s bonds were downgraded and frozen from trading. It sometimes was already referred to the next “Lehman Brothers” case.  The volatility the stock has seen since is tremendous, as it lost nearly 80% in the first few days after the announcement. It seemed as though the situation had stabilized, but since not all due payments were paid on Friday, 24th September 2021, the status is unknown. If nothing else happens, which is highly unlikely, the company would enter a grace period following bankruptcy. There are three critical features involved in Evergrande. Firstly, China and Chinese people are heavily engaged with the company, as the company has sold many buildings already without having built them yet. A default would cause huge issues for the affected people. Secondly, many companies are frequently doing business with Evergrande, in particular construction, design and other suppliers, could also face bankruptcy alongside Evergrande. Lastly, the collapse of Evergrande would pose a substantial risk to the financial system of China. The latter one is in particular difficult, as the company has outstanding debt at more than 250 banks, which could put additional pressure on China’s ability to offer cheap debt, which is necessary to maintain growth level. Moreover, it does not make a China a more appealing place to invest for foreign investors, which were already on the decline since the recent developments. In September 2021, many other important macro-economic decisions took place. Many central banks have announced their most recent update on their monetary policy. The Fed is still discussing on the further move, while the current move seems to be a tapering of the asset purchase program. The ECB has clearly stated that the volume of their asset buying program will be reduced in the coming two quarters, while rates are maintained at their current level. Inflation in August 2021 has reversed its course to some degree, as the US inflation fell slightly to 5.3% from 5.4% from both, June and July 2021, while the European and UK inflation surged to 3.0%, up from 2.2% in July in Europe and 2.1% in July from the UK. In the current market ecosystem, hedge funds have done well. The hedge fund index from Barclays is up 1.23% and surpassed the 10% mark in 2021 with which the industry will keep its momentum in growth. Our SMC Cross-Asset Indices are up 46% and 51% in 2021 so far, largely backed by a very strong performance of cryptocurrency-based strategies. The two most outstanding strategies are Token and Token Liquid, which are up 378% and 284% in 2021 so far. Other, more defensive cryptocurrency-based strategies are still up between 62% and 97%. The past few months for cryptos were again exceptional, although the industry has suffered a slight setback earlier in September 2021. The industry’s market cap is currently at $1.89tn with the major currencies Bitcoin (BTC) and Ethereum (ETH) trading at $42,700 and $2,900. Despite the recent decline, cryptocurrencies are still of high interest, also increasingly from institutional investors who launch numerous funds. Most of them are still focused on BTC, although demand for altcoins has increased and will play a more important role in a few years at the latest. There are some projects in the pipeline that do not focus on BTC or managing a portfolio of cryptos, such as Ethereum ETFs and similar products. That the market conditions are still favourable for the industry is clearly shown by the recent funding rounds of crypto companies, as FTX and their $900m funding round, and newly by Coinbase that struck a deal for $1.5bn in private debt. BTC was also in the news for its energy consumption. Its consumption in 2021 has already surpassed the consumption in 2020. That is certainly not a pleasant development, yet, it was to be expected; and BTC, although the largest currency, will remain one of the only chains that will remain on their cost-inefficient way of operation. Their validation principle is called Proof-of-Work (PoW), which requires validation of transaction being done by a single user who gets rewarded with coins – while the effort of others, that did not validate the transaction in time, get nothing. Virtually all other currencies use Proof-of-Stake (PoS), which works similarly but that the computation power is mixed together instead of competing against each other. Yet, the technology is far from perfect, as many chains are experiencing issues with the scaling of their validation. BTC is notoriously slow, ETH is only slightly better, which requires other solutions, as Solana for example (for a detailed review of Solana, see Perspective Vol. 163). Equities had a difficult, but mostly pleasant year. It largely depended on the sector, on whether it was a good time or not. Equity hedge funds reflected this behaviour very well, as the Equities US Activist Event Driven strategy had a great 2021 with a YTD of almost 35%, while others are just up a few percentages in 2021. In total, equity strategies surged 2.6% in August 2021, while fixed income strategies struggled a bit and were slightly negative in August 2021 but are up almost 5% in 2021 as a whole. In this eventful September 2021, global macro strategies tend to do well. Our global macro strategies gained around 2.5% in August and are up 35% and 25% respectively in 2021. 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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