alternative markets update february 2021

Alternative Markets Update February 2021
Hedge funds did not do that well in January 2021, as they could not continue their strong upward trend from the last quarter in 2020. Equity-related and fund of hedge funds strategies were down between 0% and 2%, whereas fixed income strategies ended the month slightly positive. Global macro strategies were in between the equity and credit strategies. Our most profitable strategies in January were crypto-related strategies, one of which is up almost 100% in one month only. This was driven largely by the growth in altcoins, in particular smaller ones. February 2021 is likely to affect equity strategies badly, as last week, stock markets dipped, due to profit taking in technology stocks and somewhat larger concerns about inflation. The inflation concerns are rising, as interest rates are increasing at the longer time horizon. In particular in the US and the UK a yield curve steepening is happening. This is further increased by the development in the central banks’ balance sheet, which have strongly grown. Figure 1 shows the central bank balance sheet over the last 15 years including a projection until the end 2022, which implied that the G4 central banks’ balance sheets will almost double since the start of 2020. Moreover, according to Figure 2, global debt has skyrocketed as well since 2020, as the global debt increased from around $220tn to $270tn at the end of 2020 and is expected to grow to close to $300tn at the end of 2022.

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RESEARCH PERSPECTIVE VOL. 150 February 2021 Alternative Markets Update February 2021 Hedge funds did not do that well in January 2021, as they could not continue their strong upward trend from the last quarter in 2020. Equity-related and fund of hedge funds strategies were down between 0% and 2%, whereas fixed income strategies ended the month slightly positive. Global macro strategies were in between the equity and credit strategies. Our most profitable strategies in January were crypto-related strategies, one of which is up almost 100% in one month only. This was driven largely by the growth in altcoins, in particular smaller ones. February 2021 is likely to affect equity strategies badly, as last week, stock markets dipped, due to profit taking in technology stocks and somewhat larger concerns about inflation. The inflation concerns are rising, as interest rates are increasing at the longer time horizon. In particular in the US and the UK a yield curve steepening is happening. This is further increased by the development in the central banks’ balance sheet, which have strongly grown. Figure 1 shows the central bank balance sheet over the last 15 years including a projection until the end 2022, which implied that the G4 central banks’ balance sheets will almost double since the start of 2020. Moreover, according to Figure 2, global debt has skyrocketed as well since 2020, as the global debt increased from around $220tn to $270tn at the end of 2020 and is expected to grow to close to $300tn at the end of 2022. Figure 1: G4 Central Bank Balance Sheets Projection, Source: Haver Analytics, National Source, IMF, Morgan Stanley Research Forecasts, February 2021 Figure 2: Global Debt Hits a Fresh Record High in 2020, Source: IIF, BIS, IMF, National Sources, February 2021 Cryptocurrencies took a significant hit with a loss of between 20% up to around 35% depending on the currency. Nevertheless, it can be expected that the month will still be beneficial, as the growth before the drop was so large. For example, Bitcoin (BTC) will probably close the month with a performance of +40%. The cryptocurrency market is currently extremely volatile, as BTC started the month at $33k, rose above $58k and dipped below $44k again. During the bull run of BTC, it reached a market cap of more than $1.1tn and has since fallen back to around $850bn. Ethereum (ETH) has taken even a bigger hit then BTC. ETH has reached the $2k mark and has since dropped to $1400 occasionally. In the initial downturn, Kraken had a major issue with its matching algorithm, during which ETH has was trading at around $900 for some time. Other crucial movements in the space are the continued growth in DeFi (decentralized finance), which is now at around $42bn locked in, which was just a few hundred million at the beginning of 2020. Alongside the surge in altcoins, decentralized exchanges (DEX) trading volumes have surged as well. Figure 3 shows the monthly trading volume of DEX. January 2021 set a net record high with a trading volume of $65bn. During last week, when both equities and cryptocurrencies suffered, commodities also took a significant hit, as gold has reached its lowest point within the last seven months and is currently trading just above $1700 per ounce. Figure 3: Aggregate Monthly Volume for Decentralized Trading Platforms, Source: Coindesk, February 2021 Another hot topic of 2021 so far are SPACs, which surged due to the IPO boom and at the same time fuelling the IPO boom even more. In 2021 so far, 144 SPACs have gone public already, raising a total of $44bn. This number already exceeds the number of SPACs of the entire half of 2020. Figure 4 shows an overview of the capital raised by SPACs in the US. Figure 4: US SPAC Capital Raised, Source: Dealogic, Goldman Sachs Global Investment Research, February 2021 STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). In private assets, we advise 10+ sponsors and general partners across private equity, venture capital, private credit, real estate, capital relief trades (CRT) by structuring funding vehicles, rating advisory and private placements. As of 16th February 2021, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 60.3 billion. 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