STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.88
Our in-house strategies in credit, equity and fund of funds, as measured by our indices, have performed better in the first half of the year than their traditional and alternative peers. Tactical trading is still lagging due to the struggling performance of the actively managed altcoin strategy this year mainly driven by falling bitcoin prices. Equities are the top performing and the bucket that has the most representatives in the top-5 performing table, followed by credit/fixed income strategies.
Hedge funds started 2017 under pressure and the overall industry’s model was in question. Performance and fees were the main topic of debate among investors at the beginning of the year, but hedge funds managed to pull a strong year with no down month. Despite losses from some large managers, the industry overall generated strong returns according to HFR data attracting more capital. Per HFR, total hedge fund industry AuM increased by $59bn to $3.21tr, the sixth consecutive quarterly record for total industry AuM. The inflows suggest a sign of regained optimism, but the industry will need to sustain its performance long-term in order to regain its calibre. The oxymoron of the industry is the fact that equity hedge were the best performing strategies amongst hedge funds but suffered the biggest outflows. Macro, CTAs and multi-strategy attracted more capital this year, and given the outlook for more volatility and less central bank intervention, investors target further allocations in those sub-sectors.
Stone Mountain Capital Strategies
2017 was the year producing the strongest return for hedge funds since 2013 and second best since 2009. Stone Mountain Capital strategies outperformed in last year’s environment across all asset classes. Credit was the only strategy underperforming its peers, caused by yield compression in the direct lending space. One, out of only three negative strategies was in credit, while the other two, were CTAs that struggled amid the low volatility and trendless environment. Despite these two strategies, tactical trading was overall the best performing strategy with strong returns generated by discretionary global macro and cryptocurrency. Equities enjoyed a very profitable year and Stone Mountain Capital’s mandated equity hedge managers produced astonishing returns, beating their traditional and alternative peers. Finally, fund of hedge funds recovered from their 2016 losses, surviving while the industry’s model is evolving.
Figure 3. Stone Mountain Capital In-House Indices vs. Major Benchmark Indices Hedge Funds and Long Only in 2017, Stone Mountain Capital Research; SMC strategy indices are not investable products but are used as indication of our managers' performance and are calculated with the equally-weighted method.
STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.63
The current market environment is characterised by high valuations in equities and low yields in traditional fixed income markets, urging investors to seek for alternative, diversified and stronger sources of return. Private debt is on its way to becoming an established asset class and falls under fixed income and private equity allocations of institutional investors. There is a broad set of opportunities within the private debt spectrum that spans from investment grade assets (IG CLOs, real assets and real estate senior debt) by lending across capital structure in mezzanine, to equity and first-loss like assets (distressed debt, CLO equity/warehousing/risk retention), depending on the risk-return profile of the institution. Navigating from the investment grade to high yield strategies (direct lending, capital relief trades, distressed debt and special situations) investors identify diversified sources of yield generated from illiquidity, complexity and regulatory premia. The $600bn private debt industry is set to exceed $1 trillion according to a research paper from the Alternative Credit Council.
STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.55
The hedge fund industry is recuperating after two years of struggle. During the first half of 2017 hedge funds lived up to their investors’ expectations, who are looking to increase their hedge fund exposure for diversification and risk-return enhancement. The industry approximates $3.2 trillion in assets under management (AuM) across all strategies according to BarclayHedge with over five thousand institutional investors eyeing on the space of over 15,000 hedge fund strategies globally. Those numbers suggest an overcrowded space and considering data from the Asset Management Association of China, managers in China reach 25,000, the industry is in need of more regulatory attention.
Active management is again in demand and hedge funds will have to compete with their peers to attract more assets and it will be worthy to observe the fundraising arena. Using data from BarclayHedge for five main core strategies AUM, we observe that the main investor focus is on equity hedge (long/short, long-only and market neutral) and fixed income strategies, which are accounting for 25% and 18% respectively of hedge fund AuM. Macro and CTA strategies with $600bn account for 18%, while event-driven strategies are occupying only 5% of the industry’s AuM.
STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.47
Bitcoin is enjoying a plenty of attention lately due to the rally in its price driven by its usage as frictionless payment solution and the catalyst: the ambitious plans of the Winklevoss brothers to launch the first bitcoin ETF. Friday, 10th March though was the day that SEC rejected the brothers’ ETF application, which could have been a ‘revolution’ for the digital currency in the investment space, like the first Gold ETF, due to the anticipated inflow of new institutional capital. The same day, after the ETF disapproval, the price of Bitcoin plunged to levels around $1000, which constituted an almost 18.5% decrease intraday. Bitcoin price recovered immediately and currently trades around $1230, proving that the drivers of demand for the digital currency are strong regardless of the launch of an ETF. We are living in the age of the machines, where investors are looking for fintech, artificial intelligence and machine learning supported products to source uncorrelated alpha for their investment portfolios. This perspective will examine the Bitcoin and CTA market to analyze its effect on investors’ portfolios.
There are hundreds of different cryptocurrencies, but only two managed so far to distinguish themselves and establish a market. Bitcoin is the most capitalized with current market capitalization being around $20bn. Ethereum, its only relevant peer so far, has a market cap of around $2bn. Bitcoin is the main player in the cryptocurrency spectrum and its growth is significant over the last 3 years. Since 2014, $15bn of new capital has boosted the growth of bitcoin as a new asset class. CTA AuM has risen by $22bn since 2014 and is currently at an all-time high of $340bn, proving that machine related strategies are here to stay while attracting new capital allocations.