Alternative Markets Update April 2020

Alternative Markets Update April 2020
The market remains highly uncertain and it is acknowledged that this crisis is different to what the world has ever seen before. Even compared to previous emergency situations, the crisis involves more layers, most notably, the coronavirus pandemic itself, the biggest drop in oil prices ever and the number of central bank interventions the world has ever seen. Regarding the coronavirus, the situation is substantially different across continents. In Asia, China is slowly returning to its normal life, whereas other countries such as India have declared state of emergency relatively recently. In Europe, the situation is getting better, as the most severely hit countries have declining daily infections and deaths related to Covid-19. Furthermore, countries have announced the loosen the restriction, some of which have been already implemented as shown in Austria. In the US, the situation is getting more tense, as the country has more than half a million of infections and the development in cities such as New York, where mass graveyards are dug, is alarming. From a macro perspective, there are many concerns, such as the monetary policy, the wide job losses and the decline in GDP. Monetary policy adjustments are mostly used plus massive fiscal stimulus. As mitigation for the job losses, rescue packages are provided by governments and central banks. The US is providing a package worth $2.3tn, whereas the EU agreed on a €500bn rescue budget. The GDP considerations are highly uncertain, as at its core, it reflects the trade-off between the health of citizens and economic damage caused by the virus. However, there are many different estimates and some of them implicate huge declines of up to 30% in GDPs for example in the UK. 

When shifting the perspective to the alternative industry, the general pictures looks slightly better. Hedge funds were mostly able to limit the downfall in the equity market and remained in the single-digit loss area overall in March. Figure 1 shows the historic worst quarters of the hedge fund industry. Despite the second largest loss, the total change in the AUM reduced the least among those five worst quarters. The performance of hedge funds is largely dependent on the strategy pursued, whereas long volatility and tail risk strategies are up 30% on average, most strategies have losses in the single digit area and some, especially those with strong equity exposure are down up to 20% according to Figure 2. Nevertheless, the private markets are looking healthy, as most industries sit on a record dry powder ready to be committed, although these investments are likely to be postponed until the economic situation is getting more stable, there will be great opportunities, due to dips in asset valuation caused by the crisis. Fundraising for private capital remains at an extraordinary high level when considering the current situation, as Q1 2020 was almost as good as Q1 2019, which was a record year.

Figure 1: Top 5 Worst Quarters for the Hedge Fund Industry, Source: Eurekahedge, April 2020

Figure 2: Hedge Fund Strategy Return Map, Source: Eurekahedge, April 2020

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