Alternatives Market Review 2018 And Outlook 2019

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RESEARCH PERSPECTIVE VOL.100 JANUARY 2019 Download Research Perspective Alternatives Market Outlook 2019 by Aquila Markets Some of the static themes of January – gradually worsening global data, especially in the Eurozone, US government shutdown, China trade talks, continued marking down of growth expectations by IMF and others, Brexit logjam, continued Fed “row back” – have finally started to crack with the Government Shutdown in the US being temporarily ended. This is significant for a number of reasons – initially it was the Trump White House (facing increasing criticism of simply not understanding how the world ACTUALLY works) – being shaken out of their Shutdown stance by a gradual increase in pressure on the infrastructure and the “way things work”. Wilbur Ross’s comments about unpaid federal workers “taking out loans” to cover their shortfall in their income by not being paid was clearly seminal, as was the issues around NY area airports last Friday. Have we seen “peak-Trump”? He has blinked and his right-wing supporters will never let him forget it. The Fed also “blinked”, initially over rate hike path as even the most hawkish of FOMC members changing their tune. Discussions are now building as to potential row back from the pre-determined USD 50mio / month balance sheet reduction program. The oft shown chart of Central bank balance sheet size plotted against The Fed is below. The B/S size matters in the US. This week really matters, as is a catch up in US data releases that have been postponed to the shutdown. An ad-hoc schedule of releases is likely over the coming days/weeks – this increases the possibility for data surprise and variance in markets. Trade talks between China VP Liu He and Lightheizer this week. European Q4 GDP data this week, and raft of global inflation data too. Could we see a blink in Brexit? The chance of a deal happening is increasing (although Ref2 has been and does still remain central case). The experience of the Brinksmanship in the US is lesson for what happens to complex economies when a multitude of agencies simply stop working. Analysts have maintained that a “no-deal” Brexit was voted for in the referendum, but given the Government has not prepared correctly for it, it is understandable that Parliament rejects what could be chaos. It would be a disaster for Ireland too, given the economic links with the UK. The Irish PM has overreached over the backstop, and is holding the line. But Europe will recognise that they need a deal just as much as the UK does. News flow will remain high this week. There is an expectation that a resolution of many of the above issues is going to cause asset markets to resume their moves to the upside. The global economy is slowing – it could well be that 2018 was “as good as it gets” for this late cycle. The long held theme of globally weakening housing on a broad basis is continuing. Trades and Markets The core MO for the year remain selectively timed, funded, long gamma plays across asset classes but especially in FX. Price action this year – generally will come in waves of activity, followed by periods of relative calm. We have seen this manifesting since September, with vol zenith being reached at the end of 2018, followed by a relatively calm period where implied vol in FX, generally, became low and expensive relative to realised vol – this is ALWAYS the worst scenario for investors – vol are hard to buy (they don’t realise) and hard to sell (you are always worried about the risk adjusted returns of selling low implied especially in an event risk laden world). This is why funded spreads are such an important part of the trader’s tool box this year. In the past week, being outright low has been less than successful as vol have sold off hard, but using spreads has mitigated this. Nevertheless, we have seen pockets of variance appearing in certain pairs, often generated by data or new wise releases. In macro markets – main focus remains on SP500 as major proxy (technically many FX pairs charts have been damaged with the flash crash moves earlier in January and the difficulty of knowing exactly what lows were). ES1 has dug deeper into the resistance zone – but note the lower daily last week; with Friday’s high at 2672.50 failing to trade above the post Xmas Eve low rebound high at 2677.75 Focus on support zone at 2623/33, a break of which would herald a deeper test into mid 25’s. Also note that USDJPY has topped out at 110.00, US 10years at 2.80, oil 54.00 etc. USDCAD gamma offers value – spot is at an inflection point – daily double bottoms 1.3180, 100dma 1.3206, RSI’s oversold, vol on the low and a higher spot will equate to higher vols. Break lower in spot – gamma is likely to perform but vol will be supported off this vol base. Gamma trades focused on from the Fx side – USDCAD(mentioned above), EURAUD, CHFJPY, USDJPY. Volometer is attached below. As always a mine of information. GBP cross vol have been pushed lower with the higher spot. Reaching value levels? Selective gamma plays could be a play for those involved (or for those who have caught the Sterling rally to hedge). Central bank balance sheets (Fed, ECB, BOJ, PBOC in USD) vs Global Equity Market Cap (USD) Four major central bank balance sheet sizes (local currency) ES1 (SP500 future) USDCAD – classic inflection point trade opportunity to own gamma Volometer This perspective is neither an offer to sell nor a solicitation of an offer to buy an interest in any investment or advisory service by Stone Mountain Capital LTD. For queries please contact Alexandros Kyparissis under email: alexandros.kyparissis@stonemountain-capital.com and Tel.: +447843144007. For further information around our research and advisory services please contact Oliver Fochler under Tel.: +447922436360 and email: oliver.fochler@stonemountain-capital.com. The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer. Chris Eagle Chief Executive Officer E : chris.eagle@aquilamarkets.com M : +447712885718 www.aquilamarkets.com Chris Eagle has held sales and trading roles in Foreign Exchange and Fixed Income businesses at Investment and Commercial Banks over his twenty plus year career. He spent much of his early career at Morgan Stanley, both in New York and London, before spells at RBS, UniCredit and CIBC. His recent roles have included Managing Director at Jefferies, and Global Head of FX for the broker-dealer firm, Marex Spectron. Aquila Markets acts as a consultant to a number of buy and sell side firms across various aspects of finance. Chris holds a BSc degree in Biochemistry from the University of St. Andrews. Alternative Markets Review 2018 2018 started as strongly as it finished in 2017, but spikes in volatility caught hedge funds unprepared and highlighted the weaknesses of the industry. The rest of the year continued in the same pattern with major political risks adding to the problem such as Brexit outcome, European elections, end of quantitative easing and trade war. The fourth quarter and equities sell-off since October ruined hedge funds hopes to rebound and sank them deeper into their losses.  Event-driven and equity hedge strategies were the worst performers among hedge funds, followed by systematic CTA and macro strategies. For our in-house strategies, the scenery was slightly altered as the worst performing asset class was tactical trading. Underperformance of cryptocurrency and CTAs are the main drivers of the underperformance compared to other indices, despite the strong performance of our global macro and market neutral strategies. Equities globally suffered severe losses, similar to the majority of our in-house strategies. Our niche equity strategies focusing on disruptive technologies and directors' dealing though posted strong returns and constitute our best two performing strategies for 2018, consequently leading to a relative outperformance of peer indices. Direct lending and structured credit enjoyed a good year assisting in our credit index's outperformance. Only two out of eight strategies posted losses for a year, when equity and credit largely disappointed their investors. Overall, our cross-asset and single manager index posted losses for the year due to our tactical trading underperformance, but still performed better than the majority of the individual indices.   Credit/Fixed Income Strategies YTD 2018 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC Credit Strategy Index 3.69% 8.66% 5.06% 1.61 0.43 Credit Suisse Fixed Income Index 1.10% 5.03% 5.01% 0.61 -0.29 HFRX Credit/Fixed Income Index -2.55% 5.08% 5.06% 0.60 -0.38 UAIX Fixed Income-Global (UCITS) -2.46% 0.86% 1.52% 0.57 0.74 BofA ML US Corporate Master Index -2.44% 7.30% 6.30% 0.84 -0.16 Equity Strategies YTD 2018 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC Equity Strategy Index -2.56% 10.82% 13.46% 0.69 0.23 Credit Suisse L/S Equity Hedge Index -4.62% 8.49% 8.91% 0.73 -0.06 HFRX Equity Hedge Index -9.42% 4.73% 7.83% 0.34 -0.23 UAIX L/S Equity (UCITS) -10.33% 2.83% 5.29% 0.33 0.66 S&P 500 -5.32% 7.27% 14.31% 0.37 -0.09 Tactical Trading Strategies  YTD 2018 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC Tactical Trading Strategy Index -13.02% 23.39% 25.77% 1.13 0.30 Credit Suisse Global Macro Index -0.11% 9.45% 8.62% 0.86 -0.02 HFRX CTA Index -5.08% 3.39% 9.37% 0.14 -0.31 HFRX RV Volatility Index -8.48% 3.78% 4.93% 0.36 -0.35 CBOE Eurekahedge RV Volatility Index -2.81% 8.11% 3.72% 1.64 -0.17 UAIX CTA (UCITS) -8.58% 1.77% 8.86% 0.20 0.28 Fund of Hedge Funds Strategies YTD 2018 Annualised Return Annualised Volatility Sharpe Ratio Sortino Ratio SMC FoHF Strategy Index -1.36% 5.85% 6.88% 0.57 -0.21 HFRI FoHF Index -3.92% 6.32% 5.45% 0.79 -0.35 UAIX Multi-Strategy (UCITS) -5.65% 2.62% 3.36% 0.78 0.94 SMC Single Manager Cross-Asset Index -3.66% 14.18% 14.36% 1.19 0.33 SMC Cross-Asset Index -3.46% 13.83% 13.93% 1.17 0.30   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 26th November 2018, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 52.8 billion in hedge funds and private assets. 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All of our forward-looking statements are subject to known and unknown risks, uncertainties and other factors that are in some cases beyond our control and that may cause our actual or our research results to differ materially from our expectations. Except as required by law, Stone Mountain Capital LTD undertakes no obligation to publicly update any forward-looking statements for any reason after the date of publication in this research, our website, or on linked websites, whether as a result of new information, future events or otherwise. Risks Investments in alternative investments are speculative and include a high degree of risk. Investors could lose their entire investment. Past performance is not necessarily indicative of future results. The risk of loss in trading interests can be substantial. You should carefully consider whether such trading or investment is suitable for you in light of your financial condition. 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