Alternative Markets Outlook 2022
2021 was firmly in the grasp of Covid-19 through the Delta and Omicron strain. Although Covid-19 was managed solidly, the imposed restrictions and the economic interventions have severely impacted the economy and society. Not only has inflation skyrocketed but it is also likely to persist for quite some time. In January 2021, the US CPI was at 1.4% and rose to 6.8% in November 2021. In Europe, the situation looks similar, although the initial surge started earlier in the US and currently Europe’s inflation is lower with 4.9% in November 2021. In 2022, inflation will prevail with even higher levels in early 2022 with a realistic chance to subside towards the latter part of 2022. This rather grim outlook is largely in line with the observation during 2021, when inflation targets were mostly too low and the estimated time period were too short. The US will probably experience slightly higher levels, due to the larger extent of money printing to fight Covid-19 originally. Central bank intervention will be reduced to normal levels in the latter part of 2022. It has been already announced that they will scale back their asset buying programs but not entirely. Depending on how Covid-19 is evolving, it seems reasonable that towards the end of 2022, these programs will be discontinued. Aside from these monetary interventions, there were also substantial fiscal interventions, as shown in Figure 1. Figure 1 depicts the US national debt and the increase of additional trillion of debt. Since Covid-19 emerged, six additional trillions were spent to fight the immediate impact. In particular, the speed at which the money was spent is remarkable. While it took between 30 and 300 days for an additional trillion during Covid-19, it took between 170 and 320 days during the global financial crisis in 2008. The measure undertaken to fight Covid-19 are massive but they have helped the economy to bounce back. Among others, the development of the employment is largely desirable. For example, in the US, the unemployment rate was reduced to 4.2% from its peak of more than 14% in 2020. Equity markets, which have contributed in a major fashion to the overall success of 2021, will be largely impacted by Covid-19 in 2022. This was once again observable in November 2021 when Omicron emerged. Assuming a positive development, it is likely that equity markets will keep rising, although at a normal pace below unlike 2020 and 2021. Figure 2 and 3 show the S&P 500 and the Euronext 100 indices over the past two years. Since January 2020, the S&P 500 gained 47.5%, while the Euronext 100 gained 18.9%. The gains since their bottom in March 2020 are 118.4% for the S&P 500 and 86.0% for the Euronext 100. One potential reason for the strong growth in 2020 and 2021 may be due to expected inflation ahead, which is compensated by higher nominal gains. This effect is likely to fade given the enormous growth numbers in 2021 which have given rise to doubts about the sustainability of these profits alongside fears of another financial bubble. This is in particular true for industries that have benefited from Covid-19, such as technology. One example of seemingly unhealthy gain is Tesla, which is up more than 1,000% since Covid-19 emerged. The companies benefiting from Covid-19 should be viewed with caution, while companies that were negatively affected by Covid-19 certainly involve less risk. A negative development with the handling of Covid-19 could turn the situation upside down again and trigger similar effects as in March 2020. This may occur, for example, if a new strain emerges with a substantially increased fatality rate, is spread relatively easily and vaccinations are of only mediocre effectiveness against the new strain. Yet, this scenario is rather unlikely given that with each wave, the number of infections remains at a relatively similar level, while hospitalizations and fatalities decline. Furthermore, virus strains that spread more easily, such as Omicron, frequently are less deadly. These two observations favour the good scenario going forward. In an environment of high volatility and many opportunities, alternative assets are well positioned. Figure 4 highlights the volatility in the market measured by the VIX. Since the occurrence of Covid-19, the volatility in markets has never reached levels prior to Covid-19, although there has been a massive improvement. From the peak in March 2020 and a level of more than 80, markets have stabilized between 15 and 25 in quiet times with occasional spikes. With regards to alternative assets, 2020 and 2021 were highly beneficial for several reasons. Firstly, in crises, actively managed vehicles are of increased interest as they try to mitigate the negative impact of the crisis. Secondly, due to the nature of being a healthcare crisis, this brings many opportunities with it. Thirdly, the substantial uncertainty in markets also favour alternative assets, as for example, private equity funds are less sensitive to significant short-term volatility. 2021 was especially profitable for the private equity and hedge fund industry, which make up the largest part of alternative assets. In the following sections, hedge funds, private equity, private debt and crypto assets are discussed in a more detailed fashion.

Hedge funds are doing very well currently. After having suffered substantial drawdowns in March 2020, they delivered what they promised to do. They were able to limit losses well, while profiting significantly from the subsequent upswing. This positioned hedge funds in a good light towards potential investors that previously stepped away from hedge funds or planned to, due to their frequent inability to generate excess returns in boom phases over the last few years. As the crisis was handled well by the industry, this perception significantly shifted. Preqin reported that the average return of hedge funds in 2020 was 16.69% and 12.73% as of June 2021, which are remarkable numbers for this environment. In particular, as some sectors and industries, such as fixed income, are struggling since Covid-19 emerged. Figures 9 to 14 provide a summary of our benchmark indices compared to other widely known benchmarks, based on fixed income, equity, tactical trading and fund of hedge funds strategies. Our two major benchmark indices, the SMC Single Manager Cross-Asset Index and the SMC Cross-Asset Index, are up 26.79% and 24.59% as of June 2021. Fixed Income strategies continue to struggle but managed to achieve solid one-digit returns over 2020 and 2021. The two most outstanding strategies in this asset class are European High Yield L/S Credit with a return of 13.37% in 2021 and Trade Finance Crypto with a YTD of 9.11%. The latter also has not experienced a single negative monthly return since its inception in January 2017. The performance of equity-based strategies in 2021 is 7%, while the individual strategies widely varied since 2020. On the one hand, Long/Short US Equity Consumer, TMT, Healthcare had a stellar return of 66% in 2020 but is stagnating in 2021 with a YTD of 0.13%. On the other hand, Equities US Activist Event Driven was up only 2.52% in 2020 but is up 30.68% in 2021 so far. Our SMC Tactical Trading Strategy Index is up 14% in 2021 and was up 62% in 2020. The global macro strategies deviate strongly from each other’s monthly returns. The Discretionary Global Macro strategy is up 26% in 2021, even though it suffered a loss of 18% in June 2021. In 2020, the strategy also achieved a return of 27%. The Systematic Global Macro strategy is up only 2% as of June 2021 but was up 97% in 2020. Unsurprisingly, the SMC Cryptocurrency Strategy Index had the best performance in both 2021 and 2020. In 2021, the index is up 101% and in 2020 340%. The crypto-based strategies range from Token Liquid with a YTD 2021 of 171% to Bitcoin that is up only 19.2% YTD 2021. Over the last two years, the Token strategy was the most successful one with being up 504% in 2020 and another 164% in 2021. Cryptocurrencies are further described in following section.

Alternative Markets Update March 2021
In the current uncertainty in the markets, macroeconomic factors play an important role aside from Covid-19 and the vaccination efforts. Inflation is a major concern in 2021, even though it was very obvious in 2020 already. However, in 2020, it was completely overshadowed by Covid-19 and the tremendous surge in equity markets among others. Inflation is a concern around the world, caused by the severe interventions undertaken by central banks. In particular in the US, where the FED intervened with money printing on such a scale that it cannot be compared to any other economy. This was largely required, as conventional monetary policy was not enough, for example, lowering the interest rates to the area around 0%. Even quantitative easing could not solve the problem, even though the FED’s balance sheet ballooned. Figure 1 shows the FED’s balance sheet over the last five years. At the beginning of the crisis, the federal reserve was at around $4.3tn. In 2020, this increased by 76% to $7.3tn and is still rising in 2021. Currently, it is at almost $7.7tn. In comparison to 2008, during which the federal reserve increased by 151%, the balance sheet increased by “only” $1.3tn in absolute terms. It is important to note that during the last two decades, the FED’s balance never declined by more than 1% on an annual basis with one exception being 2018 with a decrease of 8%. Interest rates in the US have recovered quite spectacularly over the last months. Figure 2 shows the development of interest rates in major economies over the last few months. The US interest rates are higher than any other interest rate from the UK, Europe or Japan, both short- and long-term. The short-term interest rates have remained very stable, while the long-term rates have increased a lot, for example, the 10-y US treasury note is soon back at 2%.

Alternative Markets Update February 2021
Hedge funds did not do that well in January 2021, as they could not continue their strong upward trend from the last quarter in 2020. Equity-related and fund of hedge funds strategies were down between 0% and 2%, whereas fixed income strategies ended the month slightly positive. Global macro strategies were in between the equity and credit strategies. Our most profitable strategies in January were crypto-related strategies, one of which is up almost 100% in one month only. This was driven largely by the growth in altcoins, in particular smaller ones. February 2021 is likely to affect equity strategies badly, as last week, stock markets dipped, due to profit taking in technology stocks and somewhat larger concerns about inflation. The inflation concerns are rising, as interest rates are increasing at the longer time horizon. In particular in the US and the UK a yield curve steepening is happening. This is further increased by the development in the central banks’ balance sheet, which have strongly grown. Figure 1 shows the central bank balance sheet over the last 15 years including a projection until the end 2022, which implied that the G4 central banks’ balance sheets will almost double since the start of 2020. Moreover, according to Figure 2, global debt has skyrocketed as well since 2020, as the global debt increased from around $220tn to $270tn at the end of 2020 and is expected to grow to close to $300tn at the end of 2022.