Alternative Markets Update II Q1 2019

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RESEARCH PERSPECTIVE VOL.106 APRIL 2019 Alternative Markets Update 1Q2019  Hedge Funds Bad performance, pressure for lower fees and redemption constituted the environment that hedge funds faced as they were entering 2019. Despite the negativity in the industry, hedge funds proved themselves resilient and posted their best quarterly performance in a decade. Rally in equity markets was the main driver of the strong performance, but their reluctance to take full long positions in equities led to relative underperformance. Equity strategies are the biggest winners across the different strategies according to data from Preqin with CTAs starting to perform in March after a very disappointing start. Figure 1. Hedge Fund Strategies Performance 1Q2019, Source: Preqin   Although investors continued redeeming from the asset class, the assets under management in the industry rose mainly from capital gains and according to HFR, they reached to almost $3.2 trillion globally. Investors are trying to diversify their hedge fund portfolio exposure by region, sector and strategy.   Figure 2. Hedge Fund Launches and Closures since 2008, Source: Eurekahedge   Our in-house strategies followed a same pattern during the first quarter of the year, with three out of our top five managers being US Equity focused funds. The manager that invests in high conviction ideas of carefully selected hedge fund managers is enjoying a very strong quarter followed by a US equity strategy focussed on TMT, helthcare and consumer sectors with specific interest in innovation and disruptive technologies. The recent rally in cryptocurrencies led our active altcoin manager to strong performance during February and March, bringing the strategy in our top five table for the first time since 2017. Our activist strategy suffered in March, despite a really strong performance on its underlying portfolio during January and February. Finally, our discretionary global macro strategy had one of its best months ever since inception posting an astonishing +15.27%, mainly from running long duration positions in the US, Australia and New Zealand and mixed duration positioning in Europe, complemented by bond auction trading gains.   Credit/Fixed Income Strategies 1Q2019 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC Credit Strategy Index 1.69% 9.51% 4.55% 4.04 0.62 Credit Suisse Fixed Income Index 2.19% 5.07% 4.99% 0.62 -0.29 HFRX Credit/Fixed Income Index 1.30% 5.08% 5.05% 0.61 -0.38 Eurekahedge Fixed Income (UCITS) 2.87% 2.75% 3.41% 0.22 0.29 BofA ML US Corporate Master Index 4.10% 7.35% 6.29% 0.85 -0.16 Equity Strategies 1Q2019 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC Equity Strategy Index 8.81% 11.73% 13.68% 0.73 0.25 Credit Suisse L/S Equity Hedge Index 5.35% 8.61% 8.89% 0.74 -0.06 HFRX Equity Hedge Index 5.95% 4.95% 7.82% 0.37 -0.22 Eurekahedge L/S Equity (UCITS) 3.39% 3.70% 5.52% 0.31 0.43 S&P 500 12.63% 7.43% 14.32% 0.38 -0.09 Tactical Trading Strategies  1Q2019 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC Tactical Trading Strategy Index 1.52% 22.78% 25.56% 1.04 0.26 Credit Suisse Global Macro Index 2.61% 9.46% 8.58% 0.87 -0.02 HFRX CTA Index -0.52% 3.29% 9.33% 0.13 -0.31 HFRX RV Volatility Index 5.75% 4.08% 4.96% 0.41 -0.34 CBOE Eurekahedge RV Volatility Index 0.61% 8.02% 3.70% 1.62 -0.20 Eurekahedge CTA (UCITS) 5.55% 2.39% 8.14% 0.05 0.07 Fund of Hedge Funds Strategies 1Q2019 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC FoHF Strategy Index 4.47% 5.93% 6.86% 0.59 -0.20 HFRI FoHF Index 4.59% 6.43% 5.44% 0.81 -0.35 Eurekahedge Multi-Strategy (UCITS) 2.96% 2.56% 3.76% 0.15 0.21 SMC Single Manager Cross-Asset Index 3.58% 14.34% 13.72% 2.18 0.42 SMC Cross-Asset Index 3.65% 114% 13.33% 2.13 0.38 Table 1. In-House Strategies Performance 1Q2019, Source: Stone Mountain Capital Research Private Debt Private debt has become an established asset class since after the GFC, mainly driven by the need for uncorrelated sources of returns for investors and by the demand for debt financing for corporate activity. Direct lending is considered the most attractive segment of private debt, attracting the majority of institutional capital according to Preqin data during the first quarter despite a relative slowdown across the board. Surprisingly enough given the status of equity markets, distressed managers didn’t attract a lot of attention with only one fund closing this quarter. Dry powder remains elevated and the pace of deployment remains slow as deals were affected by volatility in the markets and uncertainty due to geopolitical reasons. Figure 3. Private Debt Fundraising 1Q2019, Source: Preqin   Private Equity According to data from White & Case, global private equity deal value increased during the first quarter of 2019 despite a slowdown in the volume of M&A deals and exit activity. With $2 trillion of dry powder and large geopolitical issues such as Brexit and trade war, competition for quality deals is expected to increase radically and drive valuations higher. Investors made their preferences clear when it comes to the size of the manager they allocate to, creating a rather consolidated industry with few large players. Figure 4. Global Private Equity Deal Value, Source: White & Case   Real Estate Real Estate is finding itself in a similar situation with private equity with large managers accumulating the majority of institutional capital. Fundraising accelerated as investors are looking for diversified income, in an environment where Brexit has spread concerns among investors and valuation remains extremely high, especially in Europe. Figure 5. Global Real Estate Fundraising, Source: Preqin     STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London and Swiss representative office. We are advising 30+ best in class single hedge fund and fund of fund managers across equity, credit, and tactical trading (global macro and CTAs). In private equity and private debt, we advise 10+ general partners across the sectors real estate, infrastructure / real assets and capital relief trades (CRT) by structuring funding vehicles, rating advisory and private placements. As per 26th April 2019, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 53.8 billion in hedge funds and private assets. 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