Alternative Markets Outlook H2 2019
The asset management industry experienced significant declines in 2018. Alternative assets achieved the best performance among non traditional long asset classes. The popularity of actively managed assets is decreasing for the last 15 years, while passive solutions and alternatives are gaining more attention, which is likely to continue. It is expected that the industry will experience more volatile markets, increased competition and more economic uncertainty. Especially the uncertainties will increase, for example how the US-Chinese trade war will develop, with the background of new elections in the US in 2020. Europe's uncertainty will peak on how Brexit is executed at the end of October.
Hedge funds remain strong in July after a very profitable H1 2019 and reached a new record level of market capitalization of $3.273tn. In July, hedge funds yielded positive results again. The aggregated average performance of hedge in the current year is at 7.67%, which is likely to continue. Figure 1 shows the performance of several hedge fund strategies. Noteworthy is that none of them generated negative return. The interest rate cut of the FED is likely to increase the attractiveness of hedge funds further.
Investors are currently moving cash from equity strategies to lower beta strategies, as equity markets have reached all-time highs. For H1 2019, targeted strategies were mostly credit multi-strategy and relative value arbitrage strategies. However, this shifted to macro, CTA, currency and commodity funds in July 2019 and is likely to continue during H2 2019. Despite the trade war between the US and China, the allocated capital from hedge funds in China increased further. This conflict is likely to shape the general performance of financial markets, especially in the hedge fund industry. Due to current and expected interest rate decisions from most central banks as well as the volatility of currencies, hedge funds are looking for safe havens. Gold is experiencing an increased demand, causing the price per ounce to rise to the highest level since 2016 and $1600 or even $2000 is forecasted from major US investment banks.
STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.69
The most popular and controversial topic this year within finance and tech circles is the rise of Bitcoin and crypto markets. Bitcoin jumped into mainstream and financial products like futures, options, funds, certificates, ETNs, ETFs are being designed to allow exposure to cryptocurrencies. The last one and a half month, we evidenced a huge growth of the crypto market, with its capitalisation surpassing $561bn from $182bn on the first day of November. The crypto market metamorphosed into a market bigger than CTAs, a $343bn well-established alternative investment market. Crypto market, according to CoinMarketCap, consists of 1360 cryptocurrencies, but Bitcoin and Ethereum account for around 67% of this market. Bitcoin market cap became almost three times bigger within two months, being a $318bn market now, with its price rising from $6,750 in the first day of November to $18,000. Ethereum was the fourth largest coin market in 2015 behind Bitcoin, Ripple and LiteCoin, but as we approach the end of 2017, the $66bn Ethereum market cap is nearly double of Ripple and Litecoin’s capitalisation combined.
STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.46
Alternative asset management is a growing industry, where investors seek diversification to their traditional long only investment portfolios. According to PWC, a significant increase in the assets under management (AuM) of alternatives is anticipated over the next quinquennium, reaching the levels of $15.3tn with hedge funds expected to contribute one third to that amount, which means an increase of $2tn in their AuM. Main drivers of this increase are risks associated with the geopolitical environment of investments. Major determinants of the new risk framework are Brexit discussions, major country elections and Euroscepticism in Europe, the new U.S. government and FED’s policies incertitude in the U.S., and mixed signs for growth globally. Investors are in a quandary regarding their allocations amid the current uncertainty, and are scrutinizing investment opportunities that will allow them to navigate profitably during the new era. Risk and uncertainty are two coherent terms, but different, while investors are keen on identifying the key risks in their investments. The recent spike in the number strategies (both active and passive) seeking ‘alternative risk premium’ highlights the importance of identifying risk factors.
STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL. 30
Events in bitcoin always move quickly and never more so than this week. As has been widely covered in the news, Bitfinex, the leading bitcoin exchange outside China in terms of liquidity suffered a major hack. Some 120,000 bitcoin were stolen, equating $72m USD in value at the time. Such attacks were common place in the early evolution of bitcoin, however it has been several years since one of this magnitude has occurred, made more significant by the fact that security generally in the space has been upgraded on all fronts over this period. The genesis of the attack is somewhat ironic. Bitfinex had been successfully using a cold storage protocol to secure its bitcoin, leaving only actively moving coins in its more exposed hot wallet. As part of a settlement with the CFTC, who fined Bitfinex for not allocating bitcoin directly to clients but rather pooling them in the cold wallet vault, Bitfinex moved to an allocated system. This allocated system relied on a well reputed third party, Bitgo, to provide multi-signature support to the new, account-specific, wallet. However, these wallets were not cold stored but visible online. The unknown hacker found a vulnerability in this arrangement, and it looks currently as though they obtained the API key or keys that Bitfinex used to access the Bitgo platform. Once this vector was identified the hacker bypassed all security, including delays to withdrawal, two-factor authentication and passwords, and accessed the accounts. Over a period of a few hours, thousands of individual wallets were emptied. The hack is worrying. That said the nature of bitcoin is that it is always by definition going to have an online interface at times when it is being used to trade or for transactions. Bitcoin is a work in progress and while attacks will be ever-present the lessons learned have always produced a more robust product. This however was an expensive and painful one for a large number of participants. What eight years of bitcoin history has also shown, is that bitcoin is resilient and recovers from these events. It’s hard to imagine for example, that values are several multiples higher than post the MtGox attack in 2013, after which many people declared the death of bitcoin. I am sure the ecosystem will once again adapt and go forward. In some way, with a longer term view, the events have provided an appealing entry point at the new, lower price levels.
A rare price catalyst is in sight.
STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL. 8
The main question of an investor is the asset class to invest in and its respective weighting. The first dilemma comes with the approach to follow regarding the allocation: active (smart alpha via hedge funds) or passive (smart beta via ETFs). Investing in traditional indices is substituted by ETFs, a 25-year market with increasing popularity, which attracts $3 trillion and overtook the long-standing hedge fund industry in terms of assets under management in Q2 2015.