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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 Q3 2020 - MACRO OUTLOOK BY AQUILA MARKETS

23/10/2020

Alternatives Market Update October 2020

The coronavirus has hit the world severely in 2020. Europe, which had the virus under control in summer, has seen a huge surge in daily cases among almost countries. Some countries, such as Ireland, have already reacted with measures that are close to a lockdown which many countries have experienced in March and April 2020. Stock prices, especially in the US, have risen to record levels, due to the money printing of central banks, all above the Fed. However, at the end of Q3 2020, stocks have not continued their bull run after the crash and have started to decline. Especially tech stocks, which were undeniably the winners of the crisis, have experienced a decline. Nevertheless, the drawdowns now are in no comparison of the gains realized throughout the crisis. The developments observed in the stock market also apply partly to the macroeconomic indicators of recovery, as shown in Figure 1. It shows that the economy globally as well as the US are recovering, whereas Europe and Japan are moving flat.

Figure 1: Economic Indicators by Country, Source: Andrews Gwynne, Haver Analytics, CEIC, IMF & Morgan Stanley Research, October 2020

Hedge Funds

Figure 11 and 12 show our internal strategies compared to appropriate benchmarks. Our SMC Credit Strategy Index is up 2.11% as of September 2020. The SMC Equity Strategy Index has recovered quite well over the year and is up 13.90% with the most successful individual strategies being the Long/Short US Equities Disruptive Technologies strategy with a YTD of 48.20% and the Long/Short US Equity Consumer, TMT, Healthcare strategy with a YTD of 50.08%. Our SMC Tactical Trading Strategy Index is up 104.28% as of September, large based on various cryptocurrency-based strategies. These are further elaborated in the cryptocurrency section. Regarding individual strategies, the Discretionary Global Macro strategy did very well in 2020 with a YTD of 60.75%. The AuM of the hedge fund industry is at $3.22tn as of August 2020, according to Figure 13. The industry recovered quite well, as the AuM dropped way below $3tn during the year 2020, and it is now almost back at the level of $3.29tn, where it was at the end of 2019. The most common strategy (by AuM) is long/short equity, which accounts for 34% of the industry’s AuM. The next most common strategies are multi-strategy and CTA/managed futures but these strategies already account for a substantially lower percentage of the industry’s AuM. A further breakdown of strategy volume by AuM is shown in Figure 14.

Figure 11: SMC Indices and a Comparison of Benchmark Indices, Source: Stone Mountain Capital Research, October 2020

Figure 12: Summary Table of SMC Indices and a Comparison of Benchmark Indices, Source: Stone Mountain Capital Research, October 2020

ALTERNATIVE MARKETS UPDATE - MACRO AND POLITICAL OUTLOOK OCTOBER 2020

9/10/2020

Alternative Markets Update October 2020
The Covid-19 crisis does not seem to stop, as many countries are facing a severe increase in cases, as the northern flu season is about to start. In Europe, where the spreading of Covid-19 has decreased during summer, has seen a huge resurgence of cases among most countries, some of them even topping the spreading back in March (such as Austria). In the US, where the situation with Covid-19 did not really improve during summer, the President was infected and hospitalized for two days, is now back in the office. The tension is increasing, as the election is less than a month away and due to the chaotic presidential debate. Figure 1 shows the US unemployment rate over a seventy-year period. Due to Covid, it spiked to an all-time high (not considering WWI and WWII). Nevertheless, the unemployment rate already halved again as of the last report in early October and is now 7.9%. In times of crises, real assets such as gold tend to do very well. Through this crisis we have seen the first time how cryptocurrencies do during such times, and they delivered what was expected.

Bitcoin (BTC) and Ethereum (ETH) are up 46% and 159% for the year. This boost in the main cryptocurrencies also affected the value of DeFi (decentralized finance). Figure 2 shows the value locked in DeFi, which has surpassed the $11bn mark compared to around $1bn at the beginning of 2020. Our crypto strategies have worked well in 2020 with YTDs between 62% up to 323% (see table above).

U.S. Employment Rate in Percentages, Source: Charlie Bilello & Compound, October 2020

Value Locked in Decentralized Finance, Source: Pantera Capital, October 2020

Macro and Political Outlook October 2020 by Macro Eagle
October PREVIEW
Packed calendar ahead. This week we get employment in the US, while China goes on holiday for week (mid-autumn festival). Next week we have the only VP debate, plus we will find out if Congress manages to pass another relief-package before the recess starts on Columbus Day (Oct 12th). Then, the Third Week promises fireworks with the EU Council meeting battling over the recovery fund, the EU budget and Brexit. We also get the 2nd Presidential debate, the start of Q3 Earnings and tons of economic data. After that, the Fourth Week brings us the 3rd Debate. Interestingly, on the same day, the FDA will hold a “vaccine update committee”, which makes me think that this could provide a platform for Trump to announce a tactical “huuuuge breakthrough – biggest ever”. Finally, the Fifth Week will feature the ECB (strategy review, PEPP, maybe AIT) while everybody else is counting the days to Election Day the week after. With the al-fresco days of summer now officially over, the start of the “normal” Northern flu season is upon us, so before we talk about the US election, let us quickly turn to Covid.

An Overview of Upcoming Events in October 2020, Source: Macro Eagle, 2020

ALTERNATIVE MARKETS UPDATE - MACRO AND POLITICAL OUTLOOK SEPTEMBER 2020

10/9/2020

Alternative Markets Update September 2020
Last week, tech stocks have experienced the first major loss since the start of the pandemic, after which they recovered enormously fast and reached new record levels. The recovery was mostly caused by the financial stimuli of central banks and the shift from companies to home office and similar reactions to the pandemic. Figure 1 shows the debt-to-GDP levels in 2020 and a projection of 2030. It is expected that all those will fall going towards 2030, except for the US. UK and France will likely remain at the level they are currently. Japan is currently by far at the highest level with also reaching a level of 250. One of the big topics is inflation, due to unprecedented money printing around the world, but especially in the US. Figure 2 shows the historical inflation since the global financial crisis in the US. The average during this time of the headline and core CPI are 1.6% and 1.8%, while they are currently 1.0% and 1.6% after their substantial fall when the crisis emerged.

Debt-to-GDP Levels, Source: Andrews Gwynne, International Monetary Fund & Oxford Economics, September 2020

US Inflation Since the Global Financial Crisis, Source: Andrews Gwynne & U.S. Bureau of Labor Statistics, September 2020

September PREVIEW by Macro Eagle
Famously, September is the cruellest month for equity markets, with the Dow down 41/70 times since 1950. Apart from the ongoing issues mentioned above the key events in the month ahead are: Treasury issuance and unemployment figures this week. ECB and Russian regional elections next week. New Japanese PM, TikTok deadline and FOMC during the 3rd week. Italian election during the fourth week. And the first US presidential debate in the last week. All while capital markets get hit by an avalanche of IPOs (Airbnb, Ant Financial, DoorDash, etc.). And don’t forget NATURE. In August we got fires and blackouts in California, hurricanes hitting the Gulf (Laura and Marco), the last ice shelf in Canada’s Artic breaking up and China/North Korea being hit by floods. But it is September when the hurricane season normally peaks.

September Preview, Source: Macro Eagle, September 2020

ALTERNATIVE MARKETS UPDATE AUGUST 2020 - FED WANTS OPTIONALITY - AND THAT IS BULLISH FOR VOL

27/8/2020

Alternative Markets Update August 2020
Covid-19 has caused a tremendous impact on central banks and leading to steep sovereign debt increases in the whole world. Figure 1 shows the global sovereign debt to GDP. It is currently at the second highest level it has ever been only behind WW2. As the level of 89.5% shown in the graph is just as of Q1 2020, it is likely that the level will surpass its previous high during WW2, as the most severe impact has been during Q2 2020. Furthermore, central banks had to use huge fiscal support, as shown in Figure 2. The means necessary outclass every economic crisis by far, except for wars. The differences are especially shocking when comparing it with the Great Depression starting in 1929 and the Global Financial Crisis starting in 2007.

Global Sovereign Debt/GDP Levels from 1851 to Q1 2020, Source: BofA Global Research, IIF, IMF and Maddisson Database, August 2020

Fiscal Support of the FED from 1901 until now, Source: BofA Research Investment Committee, Global Financial Data, White House Budget, August 2020

Fed Wants Optionality - and that Is Bullish for Vol! by Aquila Markets
*Fed creates optionality around Yield Curve Control and its “now in doubt” September review – which by definition creates volatility
*We are watching with interest to see if USD higher / risk lower persists, but we do not think the “highs” are in
*We believe the market is yet to begin considering a potential sweep by the Dems – this is a core theme on the radar for the Autumn
Despite having been quite sanguine about the Fed, the golden rule of the Fed “creates” volatility worked once again. There is clearly pushback within the FOMC itself to Yield Curve Control, recognising the upside of entering into a policy that the market is defacto already following is limited. Instead, the Fed has created optionality for itself. Additionally, the market started to question whether the results of the Fed’s policy review would indeed be presented in September, where average inflation targeting – ie letting inflation run Hot – would be a core part.
The timing of such a big announcement is creating an issue for the Fed, given the election, the recovery and the situation with the virus. September we believe will be entering a period of max uncertainty on the those three issues, which makes commitment to long term plans hard to justify, and it may be the Fed it trying to – again – create optionality for itself by delaying until, let's say, December.
But given the correlations we have been highlighting between rates, equities, commodities (Gold is correlating strongly with TLT, for instance) and realised volatility, any sense that rates COULD go higher caused the spill lower in stocks, especially given the horrendous breadth in US equity leadership, weakness in Asian stocks and a stalling in European markets.

ALternative Market Outlook h2 2020

13/8/2020

YTD Price Development in US Equities, US 10Y Yields, USD and Gold, Source: MacroEagle, August 2020

AUGUST PREVIEW. The most exciting week this month is clearly the first. We get to know Biden’s pick for VP (more below); I do expect the ECJ’s answer to the German Constitutional Court and we will see the next tranche of the US relief package agreed before Congress breaks for its summer recess. In the second week, as usual, we get a lot of economic and sentiment data – the rate of change being more important than the number itself. As for the last two weeks, the main calendar focus will be the virtual Central Bank symposium at Jackson Hole. Spoiler alert: August has a real bad reputation for nasty equity sell-offs. Increased US-China tension (on the back of the US presidential campaign) is probably my No1 pick for “possible trigger” (more below).

Important Events in August 2020, Source: MacroEagle, August 2020

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

ALTERNATIVE MARKETS UPDATE Q3 2020 - MACRO OUTLOOK BY AQUILA MARKETS

ALTERNATIVE MARKETS UPDATE - MACRO AND POLITICAL OUTLOOK OCTOBER 2020

ALTERNATIVE MARKETS UPDATE - MACRO AND POLITICAL OUTLOOK SEPTEMBER 2020

ALTERNATIVE MARKETS UPDATE AUGUST 2020 - FED WANTS OPTIONALITY - AND THAT IS BULLISH FOR VOL

ALternative Market Outlook h2 2020

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