STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.94
​
Lending has always been the core banking business over centuries until the great financial crisis hit in 2008, which gave birth to a new asset class: private debt. For years, private markets were dominated by funds focusing on equity and banks on debt. The regulations that came into force in the aftermath of 2008 financial crisis created a funding gap for a specific market segment. Large corporates can finance themselves via debt and equity public issuance or bank lending, but funding middle market and SME corporates remains a challenge. The rise of debt funds together with fintech firms’ efforts to revolutionise alternative credit are shaping the current private debt environment, which is still enjoying a strong fundraising momentum. The 2023 forecast shows an increase for private debt AuM to $1.4 trillion, while assets have doubled since 2008.

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
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 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.