alternative markets update may 2021

​Last month, it was reported that the hedge fund industry surpassed the $3.8bn mark. This month, reports revealed that the industry has surpassed the $4bn mark for the first time. Currently, the AuM of hedge funds is around $4.15bn. This growth is largely backed by two distinct factors. Firstly, the industry saw substantial positive net flows since Covid-19 after multiple years of consecutive negative net flows. Figure 1 shows the net asset flows of hedge funds from Q1 2015 until Q1 2021. The industry managed to change the negative perception of the last few years by mitigating the drawdown during the Covid-19 crisis. The second factor for the strong AuM growth over the last year stems from the performance of the hedge funds themselves, as many equity strategies are up multiple 10% since March 2020. Our SMC Equity Strategy Index is up 3.2% in April 2021 and some strategies being up more than 7% in April 2021. The best equity strategy in 2021 is the Equities US Activist Event Driven strategy, which is up almost 20% in 2021.

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RESEARCH PERSPECTIVE VOL. 156 May 2021 Alternative Markets Update May 2021 Last month, it was reported that the hedge fund industry surpassed the $3.8bn mark. This month, reports revealed that the industry has surpassed the $4bn mark for the first time. Currently, the AuM of hedge funds is around $4.15bn. This growth is largely backed by two distinct factors. Firstly, the industry saw substantial positive net flows since Covid-19 after multiple years of consecutive negative net flows. Figure 1 shows the net asset flows of hedge funds from Q1 2015 until Q1 2021. The industry managed to change the negative perception of the last few years by mitigating the drawdown during the Covid-19 crisis. The second factor for the strong AuM growth over the last year stems from the performance of the hedge funds themselves, as many equity strategies are up multiple 10% since March 2020. Our SMC Equity Strategy Index is up 3.2% in April 2021 and some strategies being up more than 7% in April 2021. The best equity strategy in 2021 is the Equities US Activist Event Driven strategy, which is up almost 20% in 2021. Figure 1: Hedge Fund Asset Flows, Source: Preqin Pro, May 2021 Cryptocurrency-based hedge funds did even better than equities in April 2021, as some strategies are up more than 20% in April and between 100% and 425% in 2021 so far. However, these number should correct, once the May performances are released, as the cryptocurrency market has suffered a substantial drawdown, after a year of stellar growth. After China released a statement on the ban of cryptocurrencies for financial and payment institutions, the crypto market lost more than 50% for a short time. This was further amplified by Musk’s concerns about the sustainability of Bitcoin (BTC) in particular, and Tesla removing the option to buy cars with BTC. BTC fell to a low of $30k, down more than 50% since it reached its high of $63k earlier this year. Ethereum (ETH) fell to below $1.8k from its prior high of $4.3k. The market has recovered a bit, but it still far off from where it has been this year already. BTC is currently trading at $36.8k, still being up 26% in 2021. ETH is trading at $2.6k and is still up 251% in 2021. Despite the severe losses, in the crypto industry, this correction is largely perceived as positive for several reasons. Firstly, it is healthy correction given this and last year’s exceptional growth and it emphasized again that cryptocurrencies are a highly risky investment and should not be bought carelessly. Secondly, it is not China’s first announcement of restricting cryptocurrencies and it is widely known that China is developing its own form of cryptocurrency. Figure 2 shows the historical drawdowns of BTC. Most of them were caused by exchanges being hacked, but also a previous announcement from China that banned BTC in 2014. Thirdly, the environmental concerns raised by Musk’s tweet are not such a huge concern, as they currently seem. Although BTC and in particular its proof-of-work system consumes a lot of energy, this system is almost exclusively used for BTC. Most other currencies, such as ETH, instead use a proof-of-stake system. This means that there is no competition on verifying transactions, but rather a collective approach, which consumes a lot less energy. Moreover, many BTC miners are gradually switching to sustainable energy, which is a trend that goes on for at least a year now. Fourthly, the crash showed that cryptocurrencies behave as they should - with no market interventions. But more importantly, it showed how decentralized finance (DeFi) and especially decentralized exchanges (DEX) work. During the crash, in particular when BTC hit the $30k mark and ETH reached $2k, centralized cryptocurrency exchanges, such as Coinbase and Binance, were down for several minutes. In contrast, DEX, such as Uniswap, had not experienced any downtime, further strengthening the case for decentralization. Figure 3 shows the trading volume of DEX and its development over the last year. In March 2020, the trading volume was around $1bn, whereas since 2021, the volume was consistently over $60bn per month. A similar development occurred for DeFi, which grew from around $1bn in locked value into DeFi protocols at the beginning of 2020 to almost $80bn in May 2021. Figure 2: Historical Bitcoin Drawdowns, Source: Coin Market Cap & Visual Capitalist Datastream, May 2021 Figure 3: Valued Locked in DeFi Protocols and DEX Trading Volume, Source: DeFi Pulse & Dune Analytics, May 2021 Gold continued its upward trend, which started in April 2021, and has reclaimed the $1.9k mark per ounce. Until April 2021, gold lost significantly in value, especially compared to its record value of almost $2.1k back in summer 2021. Earlier in the year, gold seemed to have fallen out of favor, at least partially, as BTC was seen as a better store of value at least in the short-term given its strong bull run. However, due to the continuous inflation fear in 2021, it is unsurprising that gold bounced back, in particular, as the cryptocurrency crashed earlier this month. Figure 4 shows the gold price per ounce over the last year. Figure 4: Gold Price per Ounce in the Last Year, Source: Goldprice.org, May 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). 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