Alternative Markets Update H1 2019

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RESEARCH PERSPECTIVE VOL.112 JULY 2019 Alternative Markets Update H1 2019 Hedge Funds After the difficulties for hedge funds in 2018, 2019 started strong, despite the current uncertainties, such as the Brexit, the European elections and the trade war. Only in May, there were some difficulties. This short downturn was offset and more than compensated in June, which yielded extraordinary results. Our best performing strategy was the cryptocurrency strategy, followed by US equity disruptive technology and US equity high conviction. The best performing asset class was tactical trading, which achieved a 30.78% YTD, as shown in figure 1. Furthermore, all strategies had positive return in H1 2019. Credit/ Fixed Income  YTD 2019 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC Credit Strategy Index 2.00% 8.97% 4.53% 2.82 0.31 Credit Suisse Fixed Income Index 3.39% 5.07% 4.96% 0.62 -0.29 HFRX Credit/ Fixed Income Index 3.37% 5.14% 5.02% 0.62 -0.38 Eurekahedge UCITS Fixed Income 5.81%* 3.35% 6.66% 0.20 0.27 BofA ML US Corporate Master Index 8.42% 7.41% 6.27% 0.86 -0.16 Equity YTD 2019 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC Equity Strategy Index 12.76% 11.67% 14.21% 0.64 0.24  Credit Suisse L/S Equity Index 6.58% 8.58% 8.87% 0.74 -0.06 HFRX Equity Hedge Index 5.92% 4.89% 7.80% 0.37 -0.22 Eurekahedge UCITS Long Short Equity 3.64%* 3.49% 5.49% 0.27 0.37 S&P 500 16.87% 7.46% 14.34% 0.38 -0.09 Tactical Trading YTD 2019 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC Tactical Trading Strategy Index 34.68% 27.75% 29.51% 0.93 0.28 Credit Suisse Global Macro Index 7.14% 9.54% 8.57% 0.88 -0.02 HFRX CTA Index 4.40% 3.38% 9.29% 0.17 -0.30 HFRX RV Volatility Index 6.39% 4.07% 4.94% 0.42 -0.34 CBOE Eurekahedge RV Volatility Index 0.83%* 7.93% 3.79% 1.57 3.06 Eurekahedge UCITS CTA/Managed Futures 9.34%* 2.61% 8.06% 0.08 0.11 Fund of Hedge Fund YTD 2019 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC FoHF Strategy Index 6.85% 6.01% 6.82% 0.61 -0.20 HFRI FoHF Index 6.50% 6.44% 5.43% 0.81 -0.34 Eurekahedge UCITS Multi-Strategy 3.90%* 2.59% 3.74% 0.16 0.22 SMC Single Manager Cross-Asset Index 14.67% 15.41% 14.93% 1.60 0.28 SMC Cross-Asset Index 14.29% 14.99% 14.44% 1.57 0.25 Figure 1: Overview of Performance of Different Hedge Fund Strategies: June 2019, Source: Stone Mountain Capital Research The hedge fund industry had assets under management in the value of $3.273tn in June. In the current year, $44.61bn were withdrawn from hedge funds, which lead to the fifth consecutive quarter of net outflows from hedge funds, as stated by 57% of reporting managers, even though June was the strongest months for hedge funds focusing on Asia and emerging market. In Q2 2019, 86 new hedge funds were launched. 87% of them were hedge funds and nearly all remaining launches were in UCITS. Europe accounted for 36% of all new launches, which is a huge jump from its 23% in Q1 2019. Furthermore, there is trend towards regional allocations instead of global ones. Regarding the strategies, equity are the most common with 45% in Q2, as the stock market remains strong. Macro strategies gained a lot in this quarter, due to potential volatility caused by the US-China trade war and the Brexit. Macro strategies went from 3% in Q1 to 12% in Q2. Figure 2: Fundraising in Hedge Funds Sorted by Strategy: July 2019, Source: Preqin In Q2 2019, 220 investors were looking for hedge funds. 51% of them were interested in a single fund investment, which is a significant jump compared to Q1 with 43%. 79% investors were looking for investments below $50m and only 2% were interested in investment above $300m. This indicates a trend towards smaller investments. Figure 3: Dry Powder in Hedge Funds Sorted by Strategy: July 2019, Source: Preqin Cryptocurrencies After a relatively stable phase after the huge breakdown of cryptocurrencies in Q1 2018, their prices increased again in Q2 2019. At the end of 2018 the market capitalization of the Bitcoin was around $67bn. In H1 2019, the market capitalization reached $223bn. The price of the Bitcoin achieved a similar development, which was worth 3,866$ per Bitcoin at the end of 2018. In H1 2019, the Bitcoin topped at 12,349$, which is shown in figure 4. Through the new growth, trading activity in Bitcoin rose sharply as well. The development of Ethereum is similar to Bitcoin, but not as strong. Regarding the market capitalization, Ethereum grew from $14bn at the end of 2018 to $30bn at H1 2019, which is still far away from its record of $130bn in 2017. The price of Ethereum rose from $137 in 2018 to $286 in H1 2019. Due to the great performance of the last half year, crypto strategies generated the biggest returns by far in our portfolio. Figure 4: Market Capitalization and Price of Bitcoin: July 2019, Source: Coinmarketcap Private Equity Private equity funds have reached a record market capitalization of $981bn. This market becomes more crowded, as also the highest number of funds has been reached with almost 4,000 funds as of June 2019. Buyout funds account for the biggest part of the market capitalization with $352bn. Venture capital funds are the most frequent funds with 2,388 existing funds. Figure 5: Number of Funds Raised and Their Aggregated Capital: June 2019, Source: Preqin Buyout deals account for $75bn in Q2 2019, which is a significant decline compared to Q1 2019. Buyouts in North America fell from $68bn to $38bn, even though the number of deals increased in Q2. It seems there is a trend towards smaller investments, as the number of deals remained stable from Q1 to Q2, but the value of the deals fell by $27bn.  Figure 6: Number of  Buyouts and Their Aggregated Capital: June 2019, Source: Preqin Since the record deal value in Q2 2018, venture capital deals decline sharply, which slowed down the first time in Q2 2019. However, the total value of deals remains on a high level compared to years 2014 to 2017. Figure 7: Number of Venture Capital Deals and Their Aggregated Capital: June 2019, Source: Preqin The amount of raised capital by private equity funds remains relatively stable since 2018, but the number of closings significantly dropped. Q1 in 2019 had the lowest amount of closings since 2014, which was undercut in Q2 2019. Figure 8: Capital Raised by Private Equity Funds: June 2019, Prequin Private equity funds collectively have reached a double-digit gain over all observed time horizons. The highest return was achieved in one-year with 18.2%. Venture capital funds underperformed, while buyout funds outperform private equity funds collectively in the long-run. Figure 9: Performance of Private Equity Strategies on Different Time Horizons: June 2019, Source: Preqin The available dry powder increases further, even after the big jump in 2017. Despite the trend of smaller deals for funds in general, mega-funds keep growing, both in assets under management as well as dry powder. AUM grew to $785bn, while the available dry powder reached a new record with $322bn as of 3Q 2018. Figure 10: Dry Powder of Mega-Funds in Europe and US: July 2019, Source: Pitchbook Private Debt Private debt funds continue to grow in H1 2019. A new record was achieved in the number of funds with 420 from 391 in 2018. The aggregated capital grew from $168bn in 2018 to $185bn in H1 2019. Within the year 2019, the aggreagated capital fell from $192bn in Q1 to $185bn in Q2. Direct lending is the most common fund type with 203 funds and $98bn capital, followed by distressed lending with 53 funds and $30bn capital. Distressed lendings are typically bigger deals, as for example mezzanine funds have 73 funds, but only $29bn. Figure 11: Market Capitalization of Private Debt Funds: June 2019, Source: Preqin The fundraising of private debt funds continues to decrease. Q2 2019 realized a new low in the last five years in number of funds closed. At least, the aggregated capital achieved a growth for the first time in the last year with $25bn. Q2 2019 was the worst the month in the last year, as only 17 funds were closed, raising a capital of $12bn. Compared with past years, the current fundraising of 2019 seems poor. Figure 12: Fundraising of Private Debt Funds: June 2019, Source: Preqin Despite the poor achievement in fundraising, the dry powder seems to stay constant pointing to deployment capacity.  As of June 2019, the dry powder with $269bn is almost at its record of 2018 with $278bn. Most of this capital available for direct lending with $103bn and distressed lending with $67bn.   Figure 13: Dry Powder of Private Debt Funds Sorted by Fund Type: June 2019, Source: Preqin Real Estate After setting a record in 2018 for both number of funds raised and aggregated capital, H1 2019 achieved even better results. The number of funds raised grew from 634 to 797 and the aggregated capital rose from $219bn to $253bn. Figure 14: Market Capitalization of Real Estate: July 2019, Source: Preqin Fundraising of real estate experienced the opposite of the market capitalization. It faces a huge decline in both Q1 and Q2 2019, falling from $38bn at the end of 2018 to $29bn in aggregated capital. The number of funds closed also experience a significant decline. Figure 15: Fundraising of Real Estate: July 2019, Source: Preqin 52% of real estate investors are about to commit to this asset class in the next 12 months, which is an increase from 37% in Q2 2018. The amount of investments below $50mn grew from 45% in 2018 to 54% in 2019, while the investment of more than $600mn declined from 11% to 9% in 2019. There is a tendency of committing less capital due to more cautiousness of investors. Figure 16: Dry Powder of Real Estate: July 2019, Source: Preqin 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. 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