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Alternative Markets Update November 2020

26/11/2020

Alternative Markets Update November 2020
Since the presidential election, the market has got quieter, with equities raising again, after they had experienced volatile weeks and mostly declining stock prices. The DJIA reached the 30k mark several times since then but falling below it again multiple times. Figure 1 shows the YTD (as of October) of different asset classes over the last 25 years (the entire table is here). U.S. Large Cap Stocks have gained only 1.5%, which seems low, due to the tech stocks’ raise and the media coverage they have received. Nevertheless, other industries had more difficulties in dealing with the crisis. Gold has performed very well, topping 2020 by far with a YTD of 21.9%. Figure 2 shows the performance of different hedge fund strategies. Arbitrage strategies have done best in 2020 so far with an average return 6.44%, which are low number in comparison to most previous years. Unsurprisingly, the other two most successful strategies are Long / Short Equity and Macro strategies.

Our most successful global macro strategy, Discretionary Global Macro, has yielded 52.27% in 2020 so far. Event Driven strategies have suffered the most with a loss of 2.62%, which is a solid result, especially when considering Figure 1 and the returns of other asset classes.

Figure 1 and the returns of other asset classes.

Figure 2: Ranking of Hedge Fund Strategies from 2012 until October 2020, Source: EurekaHedge, November 2020

The rapidly increasing value of BTC is largely associated with the recent announcement of PayPal to accept BTC as currency, giving access to BTC to more than 300 million users, compared to only 100 million prior BTC users. According to Pantera Capital, this has had a major impact on BTC. Figure 4 below shows the increase in BTC purchases from itBit, the provider that PayPal uses for crypto transactions. Currently, Paypal and other providers are buying more than 100% of all newly issued bitcoins, creating additional demand with it. As highlighted in the figure below, the volume of transaction is shown, which remained stable during the year, but increased tremendously since PayPal enabled BTC transactions. Given the huge surge during the last two weeks, the demand is likely to increase even more, indicating that the current surge is not over yet. Moreover, if BTC surpasses its record high from 2017, it will cover the news even more, another indicator for an even higher price.

Figure 4: Implied PayPal Bitcoin Purchases, Source: Pantera Capital, November 2020

Alternative Markets Update October 2020 - Macro and Political Outlook November 2020 by Macro Eagle

11/11/2020

Alternative Markets Update October 2020
With the whole economic environment and the high volatility in the public market, alternatives seem like a good alternative. However, Covid-19 shocked the industry, forcing a quick adaptation. The alternative industry had a great decade so far with an annualized CAGR (continuously compounded annual growth) in AuM of 10.2%, as shown in Figure 7. It is expected that 2020 will be the first year, the AuM declined on a YoY-basis. However, the alternative industry is notoriously famous for exploiting crises, in particular private equity, which will lead to substantial growth in AuM going forward. Nevertheless, the future growth will probably not exceed the last ten years the industry has experienced. It is expected that the AuM of alternatives will reach $17.2tn in 2025, with currently being at $10.7tn. Figure 8 shows which sectors of the industry will most likely be the beneficiaries. It shows that there is a huge LP interest in private equity with 25% saying that they will substantially increase their allocation towards private equity and 56% says they will increase their allocation and only 4% are saying that they will decrease their allocation. Other sectors of high interest are private debt and infrastructure, which will experience growth in AuM by more allocations from around 67%. The remaining sectors are likely to increase slightly, whereas only hedge fund will see only 40% of people tending to increase allocation.

Figure 7: Alternative Assets AuM and Forecast from 2010 to 2025, Source: Preqin

Cryptocurrencies / Blockchain

Figure 13: Total Value Locked (USD) in DeFi in the last Year, Source: DeFi Pulse, November 2020

Figure 14: Current DeFi Ecosystem, Source: Pantera Capital, October 2020

DeFi is probably the topic in the crypto space in 2020 and its steep rise during the summer. DeFi started with a total value locked in the area of millions in the year and is (as of November) at around $12.5bn. This development is also not expected to fade away towards the end of 2020, although it seems possible that there will be a decrease in growth compared to the summer. Figure 14 shows the DeFi ecosystem separated in sub-categories.

Macro and Political Outlook November 2020 by Macro Eagle
Should we get a Blue Wave, then the “consensus trades” are rotation from Growth into Value (on stimulus), overweight infrastructure/green-energy, short Treasuries (rising yields), short US Dollar and long selected Emerging Markets (like Mexico). The biggest risk in the short-term would be a sell-off due to fear of change in tax policy (wealthy Americans locking in “Stepped-Up Basis”, capital gains rate and/or Tax Loss Harvesting). The medium-term risk are higher US yields/curve steepening on the back of stimulus. For a quick overview of the other scenarios (already amply covered elsewhere) see short summary below. Also important to keep the portfolio on the right side of what won’t change, whatever the outcome: (1) More stimulus and hence higher yields; (2) China bashing; (3) Big Tech under political pressure and (4) the green-energy transition. The latter obviously turbo-charged if Biden comes in.

Figure 19: An Overview of Upcoming Events in November 2020, Source: Macro Eagle, November 2020

Figure 24: Market Position with Regards to US-Election, Source: MacroEagle, November 2020

Alternative Markets Update November 2020

Alternative Markets Update October 2020 - Macro and Political Outlook November 2020 by Macro Eagle

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