ALTERNATIVE MARKETS UPDATE – MID MAY 2024

​Inflation remains a key contributor to global risks, particularly in the US. Since June 2023, inflation has fallen below 4%. While this initially looked promising, inflation has never fallen below 3% and remains sticky. As a result, most market participants expected the Fed to cut rates several times during 2024. Recent developments have changed these expectations dramatically. At its most recent meeting, there was a significant chance that the Fed would even raise rates again. At its meeting in early May 2024, the Fed is holding its rate between 5.25% and 5.5%. While rate hikes are less likely in the near term than before the May meeting, some economists do not see a cut before 2025. Whether interest rates are lowered is increasingly dependent on the US labour market. With its current strength, the economy can tolerate higher interest rates. If the labour market shows signs of trouble, cuts are likely to come sooner than expected. While inflation will remain a key criterion for such a decision, the focus seems to have shifted to the labour market. Figure 1 shows the development of inflation and interest rates in the US, the EU, the UK, and Switzerland.
In the EU, inflation has been on a healthier decline. Inflation in the EU has fallen to 2.6% in March 2024, the lowest level since the start of the inflation spike. Interest rate cuts now seem much more likely in Europe than in the US. Even in the UK, inflation is coming down to manageable levels and the BoE has hinted at earlier cuts than previously thought. Switzerland, which has been unique during soaring inflation, was even able to already to lower its interest rate from 1.75% to 1.5% in March 2024.

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RESEARCH PERSPECTIVE VOL. 227 May 2024 Alternative Markets Update Inflation remains a key contributor to global risks, particularly in the US. Since June 2023, inflation has fallen below 4%. While this initially looked promising, inflation has never fallen below 3% and remains sticky. As a result, most market participants expected the Fed to cut rates several times during 2024. Recent developments have changed these expectations dramatically. At its most recent meeting, there was a significant chance that the Fed would even raise rates again. At its meeting in early May 2024, the Fed is holding its rate between 5.25% and 5.5%. While rate hikes are less likely in the near term than before the May meeting, some economists do not see a cut before 2025. Whether interest rates are lowered is increasingly dependent on the US labour market. With its current strength, the economy can tolerate higher interest rates. If the labour market shows signs of trouble, cuts are likely to come sooner than expected. While inflation will remain a key criterion for such a decision, the focus seems to have shifted to the labour market. Figure 1 shows the development of inflation and interest rates in the US, the EU, the UK, and Switzerland. In the EU, inflation has been on a healthier decline. Inflation in the EU has fallen to 2.6% in March 2024, the lowest level since the start of the inflation spike. Interest rate cuts now seem much more likely in Europe than in the US. Even in the UK, inflation is coming down to manageable levels and the BoE has hinted at earlier cuts than previously thought. Switzerland, which has been unique during soaring inflation, was even able to already to lower its interest rate from 1.75% to 1.5% in March 2024. Figure 1: Inflation Rate & Interest Rate in the US, EU, UK, and Switzerland from January 2022 to May 2024, Source: US Bureau of Labor Statistics, Federal Reserve, Eurostat, European Central Bank, Office for National Statistics, Bank of England, Swiss Federal Statistical Office, Swiss National Bank, Trading Economics, May 2024 The hedge fund industry has shown promising results so far in 2024. In 2023, the industry returned around 8% on average, based on data from Preqin and HFR. As of Q1 2024, this positive trend continues. The average hedge returned between 5% and 7.3% based on HFR and Citco. Our average hedge fund even manages to return around 25% in Q1 2024. Most data providers also highlight that no strategy yielded negative results in Q1 2024. The most successful strategies vary between data providers. Reported returns range from 5.2% to 8.5%, with relative value, global macro, multi-strategy and equity funds showing the best results. It is worth noting that niche strategies such as cryptocurrency hedge funds are the best performers overall. Our hedge funds also performed very well. Our Cryptocurrency Strategy Index has already returned 72% in the first quarter of 2024, followed by our Global Macro Strategy Index, which is up 33%. Our equity and fixed income strategies also posted positive returns of 9% and 1% respectively. Figure 2 shows the performance of our hedge fund indices in 2023 and 2024. The strong performance of hedge funds in 2024 has also led to a new record high in AuM for the hedge fund industry. According to HFR, the industry is managing $4.3tn at the end of Q1 2024. During the quarter, the industry grew by $165bn, driven by positive results and positive net inflows. The quarter also marks the sixth consecutive quarter of industry growth. BarclayHedge, whose AuM reports tend to be at the high end, shows that the AuM of the industry is just over $5tn, as shown in Figure 3. Figure 2: Yield-to-Date of SMC Strategy Indices in 2023 and 2024, Source: Stone Mountain Capital Research, May 2024 Figure 3: Assets-Under-Management by Hedge Fund Strategy from Q1 2018 to Q4 2023, Source: BarclayHedge, May 2024 The once-heralded crypto exchange FTX went bankrupt in November 2022, triggering another crypto winter. The bankruptcy process is still ongoing, with many expecting large losses on their deposits at the time of the bankruptcy. Recent developments show that there is sufficient capital available to repay former customers. Current estimates of available capital range from $14.5 billion to $16.3 billion in cash. According to an FTX press release, 98% of creditors will receive 118% of their cash held by FTX, while other creditors will receive 100%, including compensation for the time value of their investment. The next step is to obtain the approval of the bankruptcy court. While approval is possible, as the bankruptcy court has stated that it wants to resolve the plan "without costly and protracted litigation", it is still unclear whether this is likely. The US government is likely to challenge the plan, arguing that FTX owes it $24bn in taxes and $8.7bn in fines. So far, no government agency has agreed to give customer funds priority in the payout. The situation is particularly delicate because almost 80% of FTX's creditors are not based in the US. 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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