Alternatives Market Outlook 2017

16/1/2017

RESEARCH PERSPECTIVE VOL.42
MID-JANUARY 2017

Alternatives Market Outlook 2017

In 2017, a similar economic scenery is expected as during 2016 in an extension of the current economic cycle, and this year will be a transitory year towards a potentially unprecedented geopolitical and economic environment. This uncertainty will give rise to active investing and dynamic asset allocation with alternatives being the most attractive choice for investors. Trump’s election and Brexit belong to the past and the upcoming elections in Europe and the highly anticipated rate rises in the U.S. are going to attract a lot of investors’ attention this year. There are new risks on the horizon and investors are called to make wise choices regarding their allocations to avoid these risks and profit from them. Hedge funds have a bright outlook in 2017 after reversing the bad start in 2016 and finishing strong. The higher anticipated volatility in the markets creates opportunities for alpha-pursuing strategies across the major asset classes. Credit/fixed income strategies with short duration are expected to perform better in the space as most investors are looking for alternative income strategies such as direct lending or real estate debt. Emerging market debt enjoyed an amazing year 2016, but the rising U.S. dollar could make things worse for them this year, but there are still some very attractive opportunities. The forecasted U.S. economic growth, global inflation and a potential increase in bond yields will turn investors’ attention to sector-focused funds, systematic equity algorithmic strategies and niche strategies around U.S. equities. European equities could also offer investors with opportunities as there were outflows from European markets amid the turbulent political scenery. On the short-term, market neutral strategies could play an important role to every portfolio until the political scenery starts clearing out. Tactical trading strategies are the most exciting as volatility in the markets is about to surge, and volatility and CTA strategies are positioning themselves accordingly to profit from this environment. Discretionary Macro strategies have a ton of opportunities across asset classes with rates, currencies, commodities and emerging markets being the most lucrative. Finally, Bitcoin is expected to continue the rally it experienced in 2016 with major sovereign economies ready to accept it as addition to the U.S. dollar and a storage of value comparable to gold. The market capitalization of bitcoin is at an all-time high and bitcoin is competing fiercely and profitably with currencies and commodities as the best performing asset class during 2016. Fund of hedge funds struggled in 2016 and 2017 will make no difference as investors turn their focus to multi-strategy funds around credit and equity. Overall, there is a confident feeling on hedge funds with outflows to be limited and new investors ready to explore this asset class in their chase for uncorrelated returns. Private debt in 2017 will continue the momentum of last the years with increased deal flow and competition in both the sides of the Atlantic. The most intriguing feature of this asset class is the uncorrelated alpha generated combined with low volatility. In 2016 it outperformed both equites and credit. Volcker rule, Dodd-Frank, Solvency II, Basel III & IV, rising rates, risk retention rules deadline and central banks’ policies make the asset class extremely attractive. The asset class will attract more traditional fixed income investors as they are looking for alternative income strategies globally. Direct lending is the sub-strategy that will allure huge interest because it provides downside protection, access to attractive middle-market loans and a diversification effect to every portfolio. Direct lending in Europe is still an under-developed asset class and proper loan selection and sourcing could generate very attractive value, whereby investors should focus on sector and regional lending strategies. In private equity, there is huge demand for quality assets, but the struggle this year will be the high valuations. The volumes of PE transactions could increase due to the Volcker rule and investors are looking for best-ideas portfolios. The concept is similar to private debt in terms of opportunities as most European mid-cap companies have difficulties in accessing capital. Overall, 2017 appears to be an exciting year for alternative investments amid a very uncertain environment. The strategies that look promising this year are direct lending strategies in the U.S. and Europe, CTAs, global macro, volatility and bitcoin as we identify more space for opportunities.

Distribution Stone Mountain Capital’s 32 Strategies As Per Nov 16 YTD Returns, Stone Mountain Capital Research

The majority of negative returns originate from fund of hedge funds strategies as 7 out of the 9 negative are attributed this those managers, indicative of the general poor performance of this sub-strategy. Equity and tactical strategies contribute the most in the 0 to 4.99% interval, while the majority of Stone Mountain Capital’s credit/fixed income strategies generated between 5 and 9.99% YTD Nov 2016. A global macro strategy occupies the 10-14.99% interval and the next performance interval is occupied by emerging markets debt and US small-cap equities strategies. Finally, the top-performing strategies lie in the the tactical trading category, with systematic CTA, global macro and volatility strategies profiting strong from this year’s opportunities, while the best one is a cryptocurrency strategy focussed on bitcoin that enjoyed an amazing rally this year.

Stone Mountain Capital In-House Indices vs. Major Benchmark Indices Hedge Funds and Long Only
As Per YTD Nov 2016, Stone Mountain Capital Research

STONE MOUNTAIN CAPITAL

Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London. 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 9th January 2017, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 47 billion. US$ 44.2 billion is mandated in hedge fund and fund of hedge fund AuM and US$ 2.8 billion in private assets (private equity / private debt) and corporate finance.

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Stone Mountain Capital LTD (FRN: 729609) is an Appointed Representative of LNG Capital LLP (FRN: 454402), which is authorised and regulated by the Financial Conduct Authority (‘FCA’). Stone Mountain Capital LTD is the Distributor of foreign collective investment schemes distributed to qualified investors in Switzerland. Certain of those foreign collective investment schemes are represented by First Independent Fund Services LTD, which is authorised and regulated by the Swiss Financial Market Supervisory Authority ('FINMA') as Swiss Representative of foreign collective investment schemes pursuant to Art 13 para 2 let. h in the Federal Act on Collective Investment Schemes (CISA). Stone Mountain Capital LTD conducts securities related activities in the U.S. pursuant to a Securities and Exchange Commission ('SEC') Rule 15a-6 Agreement with Crito Capital LLC, a U.S. SEC registered broker-dealer, and member of Financial Industry Regulatory Authority ('FINRA') and Securities Investor Protection Corporation ('SIPC').

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