alternative markets update mid november 2021

Hedge funds experienced a great Q3 2021 and October 2021, as the average fund gained 1.68% and the majority achieved profits. In particular discretionary macro hedge funds gained substantially and according to JPMorgan the outlook for 2022 looks exceptionally promising for macro hedge funds. The market ecosystem is favourable, as there is considerable volatility in the market. A large, and concerning, driver is inflation that keeps rising for the entire year, although it was not a widely discussed topic at the beginning of the year. In November, the US CPI reached a new 30-year high after having stabilized since summer 2021. Figure 1 shows the US CPI and US Core CPI since 1990. Both indicators are at levels last seen around 1990s, which is quite worrying, as during the dot-com bubble and the global financial crisis, the CPIs did not spiked as much as they do now. Even more worrying is the fact that inflation is only expected to drop in summer in 2022, although this threshold has continuously been postponed, as the anticipated peaks have. A large contributor to this development are the interventions of the Federal Reserve, as shown in Figure 2. Not only has the Fed printed substantial amounts of money to fight the economic damage of Covid-19, but it also used quantitative easing to a huge degree. The balance sheet of the Fed grew from $732bn in 2002 to $2.2tn in 2009 and to $8.6tn in 2021. The increase in 2020 exceeds $3.1tn, which is more than the total balance sheet was after the financial crisis in 2007/08. This further emphasizes the degree of the intervention of the Fed. In the UK, the situation does look slightly better. This can be largely attributed to the lesser intervention from the Bank of England (BoE). Although the percentage increase is similar, the assets of the BoE “only” increased by £0.5tn and are currently at £1.07tn, as shown in Figure 3. Currently, inflation in the UK is only at 2% but it is expected to rise during 2022. In August 2021, the estimated peak was at 4%, while in November 2021, this was corrected to 5%. Unfortunately, this has been a general trend in 2021. Hence, it can almost be expected that these estimations will rise going forward.

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RESEARCH PERSPECTIVE VOL. 167 November 2021 Alternative Markets Update November 2021 Hedge funds experienced a great Q3 2021 and October 2021, as the average fund gained 1.68% and the majority achieved profits. In particular discretionary macro hedge funds gained substantially and according to JPMorgan the outlook for 2022 looks exceptionally promising for macro hedge funds. The market ecosystem is favourable, as there is considerable volatility in the market. A large, and concerning, driver is inflation that keeps rising for the entire year, although it was not a widely discussed topic at the beginning of the year. In November, the US CPI reached a new 30-year high after having stabilized since summer 2021. Figure 1 shows the US CPI and US Core CPI since 1990. Both indicators are at levels last seen around 1990s, which is quite worrying, as during the dot-com bubble and the global financial crisis, the CPIs did not spiked as much as they do now. Even more worrying is the fact that inflation is only expected to drop in summer in 2022, although this threshold has continuously been postponed, as the anticipated peaks have. A large contributor to this development are the interventions of the Federal Reserve, as shown in Figure 2. Not only has the Fed printed substantial amounts of money to fight the economic damage of Covid-19, but it also used quantitative easing to a huge degree. The balance sheet of the Fed grew from $732bn in 2002 to $2.2tn in 2009 and to $8.6tn in 2021. The increase in 2020 exceeds $3.1tn, which is more than the total balance sheet was after the financial crisis in 2007/08. This further emphasizes the degree of the intervention of the Fed. In the UK, the situation does look slightly better. This can be largely attributed to the lesser intervention from the Bank of England (BoE). Although the percentage increase is similar, the assets of the BoE “only” increased by £0.5tn and are currently at £1.07tn, as shown in Figure 3. Currently, inflation in the UK is only at 2% but it is expected to rise during 2022. In August 2021, the estimated peak was at 4%, while in November 2021, this was corrected to 5%. Unfortunately, this has been a general trend in 2021. Hence, it can almost be expected that these estimations will rise going forward. Figure 1: US CPI and Core CPI YoY since 1990, Source: Compound, November 2021 Figure 2: US Total Asset Held by All Federal Reserve Banks, Source: YCharts & Compound, November 2021 Figure 3: BoE Balance Sheet from 2007 to 2021, Source: Trading Economics & Bank of England, November 2021 Figure 4: CPI Inflation in the UK and Forecasts from August 2021 and November 2021, Source: Bank of England, November 2021 Inflation and low interest rates have resulted in strong surges in the stock market. Although there are concerns about the unsustainable increase over the last two years, the market does not seem to slow down. The S&P 500, for example, is very close to its record high set at the beginning of November 2021. Figure 5 shows the consequences of the surge in equity markets. Valuations have skyrocketed and are almost at record highs of the last 150 years. This development and the current market ecosystem are alarming, in particular when also considering crypto assets. LPs are generally concerned by the pace of fundraising at the moment. The deployment of capital is difficult if valuations are enormously and when there is so much dry powder available, which further pushes the price. The huge interest in taking part in this market is evident by the continuous fund launches. For example, Andreessen Horowitz is about to launch a $6.5bn VC fund, while Coinbase Co-Founder, Fred Ehrsam, has raised another $2.5bn for a crypto fund. The current enthusiasm about crypto asset has further increased by recent record high of Bitcoin of almost $70k and Ethereum almost reaching $4.9k. This also caused the cryptocurrency market cap to exceed the $3tn mark for the first time. This bull run of the last few weeks has been stopped on the 16th November 2021, as cryptocurrencies fell by around 5%-10% depending on the currency. Nevertheless, this is a relatively small decline for the cryptocurrency market. Figure 5: Cyclically Adjusted PE Ratio of the S&P 500 over the Last 150 Years, Source: Shiller & Andrews Gwynne, November 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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