Alternative markets update may 2020

Alternative Markets Update May 2020
​The current crisis caused a huge spike in uncertainty. Figure 1 shows the VIX closing price and the VIX futures as measures of volatility in the market. Prior to the crisis, the index remained stable between 10 and 25. After the initial outbreak in Italy and as it began to spread rapidly, it spiked to above 70, while the futures exceeded 80 at one point. Since the spike the index has steadily declined and is now back at 30, as the virus outbreak is mostly under control now, but there is still a substantial fear of a second wave that might hit, if no vaccine is found. The scenario that a vaccine is developed prior to the possible second wave is highly unlikely, as many from health care industry claim that a vaccine will be available earliest in the late autumn and even more claiming that there will be no vaccine until 2021. The second wave however is likely to appear in autumn or if reopening measures are executed too fast.

Figure 1: Comparison of VIX Closing Price and VIX Futures Within the Last Year, Source: CBOE, May 2020

As a consequence of volatility, the gold price rose substantially. The gold price continuously increased over the last year, as visible in Figure 2. It started with the trade war between the US and China, which drove gold prices up until the virus induced crisis started, at which point it accelerated its gains. After the virus had spread in many developed countries, an unprecedented day occurred, at which all assets fell, even though the reasons were different. For gold, it was due to the fear of not enough supply being available. After this fear had perished, gold started rising significantly again, especially as the Fed and other major central Banks started printing huge amounts of money, which raises the fear of inflation. As gold is an inflation hedge, it rose even further, leading to the projection of the Bank of America that gold’s target price is $3,000.

Figure 2: Gold Performance Within the Last Year, Source: Barron's & Market Data Group, May 2020

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RESEARCH PERSPECTIVE VOL. 132 May 2020 Alternative Markets Update May 2020 The current crisis caused a huge spike in uncertainty. Figure 1 shows the VIX closing price and the VIX futures as measures of volatility in the market. Prior to the crisis, the index remained stable between 10 and 25. After the initial outbreak in Italy and as it began to spread rapidly, it spiked to above 70, while the futures exceeded 80 at one point. Since the spike the index has steadily declined and is now back at 30, as the virus outbreak is mostly under control now, but there is still a substantial fear of a second wave that might hit, if no vaccine is found. The scenario that a vaccine is developed prior to the possible second wave is highly unlikely, as many from health care industry claim that a vaccine will be available earliest in the late autumn and even more claiming that there will be no vaccine until 2021. The second wave however is likely to appear in autumn or if reopening measures are executed too fast. Figure 1: Comparison of VIX Closing Price and VIX Futures Within the Last Year, Source: CBOE, May 2020 As a consequence of volatility, the gold price rose substantially. The gold price continuously increased over the last year, as visible in Figure 2. It started with the trade war between the US and China, which drove gold prices up until the virus induced crisis started, at which point it accelerated its gains. After the virus had spread in many developed countries, an unprecedented day occurred, at which all assets fell, even though the reasons were different. For gold, it was due to the fear of not enough supply being available. After this fear had perished, gold started rising significantly again, especially as the Fed and other major central Banks started printing huge amounts of money, which raises the fear of inflation. As gold is an inflation hedge, it rose even further, leading to the projection of the Bank of America that gold’s target price is $3,000. Figure 2: Gold Performance Within the Last Year, Source: Barron's & Market Data Group, May 2020 Oil has also increased in value significantly during May 2020 and rose to $35USD per barrel WTI crude oil. This development is very refreshing for oil related companies, as the volatility and the huge fall in price has caused tremendous uncertainty into their industry. During this time, the oil price even dropped to -$37 on one day, as visible in Figure 3. Figure 3: WTI Crude Oil Price During the Last 6 Months, Source: Marketwatch, May 2020 Bonds were hit severely be the crisis. However, compared to the quick rebound of equities, bonds remain low and many central banks are considering negative interest rates, if they have not implemented them yet. Germany and Switzerland have negative interest rates for quite a while now, whereas the United Kingdom is seriously considering negative interest rates. The Fed has stated that they will try to prevent that from happening. Table 1 shows a comparison of interest rates from May 2020 compared to May 2019. The rates have dropped substantially from about an average over the different maturities of 2.20% in May 2019 to about 0.25% in May 2020. The percentage year-on-year change looks even worse, as for treasury notes below a maturity of three years, it has declined by more than 90%. Table 1: Comparison of Different Maturities in Treasury Bills and Notes Compared to the Previous Year, Source: Barron's, May 2020 The covid-19 crisis caused massive QE (quantitative easing) to keep the economy running, despite the lockdown in several countries. Figure 4 shows the QE of the G-7 countries since 2008. The QE reached $1.3tn in a week during this crisis, and generally most of it was executed by the Fed. The graph also shows the QE in 2020 compared to the QE during the financial crisis, where it never exceeded the threshold of $0.3tn per month. This highlights the unprecedented interventions of the central banks since the end of February 2020. Figure 4: Quantitative Easing for G-7 Central from 2008 until May 2020, Source: Bloomberg Economics, May 2020 Hedge funds have had one of their best months in April 2020. However, the redemptions since the crisis have reduced the AuM of the industry to below $3tn for the first time in the last years. The redemptions continue, despite the exceptional performance in April, which almost lead to an industry AuM of more than $3tn again though their gains. Figure 5 shows the asset flow since 2015. Since Q2 2018, there were more outflows than inflows in the industry with a record redemption of -$47.7bn within that time period. Figure 5: Hedge Fund Asset Flows from Q1 2015 to Q1 2020, Source: Preqin, May 2020 Two weeks ago, Bitcoin (BTC) was around $9,200. Within this time until now, BTC declined slightly and spiked again on the 27th May back to $9,150. The market capitalization of BTC stayed stable between $170 and $180bn. Ethereum (ETH) was more volatile during this period, but it closed higher at $207 than two weeks ago. The market capitalization of ETH moved between $21 to $24bn. The effect of the crisis on private equity is largely unknown, as there are two major indicators, which show opposite results. On the one hand, there is one similar situation as it is now, which is the financial crisis from 2008, during which the industry’s net IRR rose more than in any other time, as shown in Figure 6. On the other hand, the impact of the initial crisis on public equity was severe, despite their relatively fast rebound. Private equity will not be immune to such an impact and it is largely dependent on the severity. Furthermore, it is not helpful that the first data during the crisis will be on Q1 2020, which includes the major fall in equity, while excluding the fast rebound that public equity saw. This might harm the industry further and scare off potential investors. Figure 6: Buyout Fund Performance of Quartiles from 2005 to 2017, Source: AIMS, Cambridge Associates & Goldman Sachs, May 2020 Our strategies performed well in April, as our benchmark indexes are up 5%. The driver of this performance were our equity and tactical trading strategies. The equity strategies are up 5.64%, while the Long-only US Equities High Conviction strategy is up 16.48% in April 2020. Most of the equity strategies are up between 4% and 7%. For the year, the equity strategies are almost back to their level at the beginning of the year with a YTD of -0.48%. Tactical trading strategies performed very well in 2020 so far. The average return of this division is up 26.87%. Our Discretionary Global Macro strategy is up more than 61% for the year. Our Bitcoin Altcoin Actively Managed strategy rebounded strongly with a gain of 24% in April. 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. 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