​Cryptocurrencies keep dominating market news with staggering gains over the past weeks. Ever since Trump won the election in November 2024, cryptocurrencies kept soaring. Trump has been a strong supporter of cryptocurrencies during his race. Unsurprisingly, when he won, optimism about the asset class increased significantly. Enthusiasm increased due to the prospect of finally clear regulation around cryptocurrencies in the US. Under Trump’s administration, he wants to avoid that the US becomes irrelevant for such a promising industry, which is frequently compared to the early tech industry – of which the US is the major hub in the world through strong support during the development of the industry. Additionally, Trump suggested a large Bitcoin reserve, which naturally pushes the price of Bitcoin. He is also filling his departments with strong cryptocurrency advocates to place the US as market leader in the blockchain technology. One of his latest moves is replacing Gary Gensler with Paul Atkins as chair of the SEC. This will likely result in further institutional support, as the asset class matures and clearer regulations are in sight. Institutional adoption is already on the rise with Australia’s AMP adding Bitcoin to its portfolio. Similarly, Ray Dalio and BlackRock are also pushing for the asset class. The previously mentioned factors led Bitcoin to soar from around $60k-$70k prior to Trump’s election to above $100k within slightly more than one month. Inflows in Bitcoin ETFs in November and December also topped the inflows after the initial approval of the first Bitcoin ETFs in the US. As of the time of writing, Bitcoin is trading at $101k with a performance of 140% in 2024. Figure 1 also highlights the steep growth in the past month.

Inflation has been a core topic since 2021, when inflation started to soar around the world. In response to this, the majority of central banks have taken the step of significantly increasing interest rates in order to combat the steep rise in inflation. Between the second half of 2022 and the first half of 2023, these measures, in conjunction with a stabilising economy, contributed to a reduction in inflation. By the end of 2023, inflation had fallen below 4% in most countries, as illustrated in Figure 1. While there have been significant differences in the prior years, the subsequent development has been consistent, albeit with varying magnitudes. In 2024 to date, inflation has stabilised, with most economies showing inflation rates between 2% and 4%. Switzerland is an exception, with inflation closer to 1%. In contrast to earlier expectations, inflation has proven to be more persistent than anticipated, with rates remaining above the frequently targeted maximum of 2%. The most notable exception was the UK, which has been hit hardest by inflation for the same reasons as other economies, but they still had to deal with the consequences of Brexit. Great Britain started in 2024 with an inflation of 4% and has since come down to 2%, where it remains steadily, whereas most other economies’ inflation has remained mostly flat throughout 2024.
As mentioned previously, central banks significantly raised interest rates to combat soaring inflation. The increases commenced at the end of 2021 and continued well into the summer of 2023, and autumn of 2023 for some countries. Since, interest rates were kept at these high levels for most of 2024 with some relief in some economies more recently. In March 2024, Switzerland became the first country to cut interest rates, followed by another reduction in June 2024. It is noteworthy that Switzerland is the only country where inflation has remained below the 2% target maximum since the summer of 2023. In June 2024, the European Central Bank followed suit by reducing interest rates (main refinancing operations rate) to 4.25%. More recently, the central bank hinted at a slower pace of interest rate cuts than anticipated after the initial cut. In August 2024, the Bank of England became the last economy to cut interest rates by 25bps to 5% in response to the promising development in inflation. In the United States, interest rates have remained unchanged since July 2023, currently sitting at 5.25%. The Fed has been hesitant to lower interest rates amid concerns about the stickiness of their inflation, as inflation has remained relatively steady since June 2023. It is also worth noting that Japan's situation is completely different. The country is renowned for its distinctive approach to monetary policy, exemplified by its central bank. The country maintained its negative interest rate throughout the period of the pandemic and its aftermath. In March 2024, the Bank of Japan increased interest rates and followed with an additional hike in July 2024. The first hike was particularly noteworthy, as the country had not raised its interest rates in 17 years. The second hike was to address two issues. The central bank also announced a bond tampering programme to boost the economy and raised interest rates significantly to combat the weakening Japanese Yen.

​The US election campaign is moving fast. Trump is leading the polls, although the race is likely to be very close. After the assassination attempt on Trump, the Republicans moved their conference forward and declared Trump as their nominee with Vance as his vice-presidential candidate. Trump has been the clear Republican nominee since relatively early in the primaries, when he won most of the votes. On the Democratic side, things have also been complicated. Initially, Biden seemed to have the nomination wrapped up, but this was gradually called into question. Since the Biden-Trump televised debate, voices around Biden's state have grown louder, leading to Biden's decision to withdraw from the race and endorse Harris as the Democratic presidential nominee. Harris kicked off her candidacy with a strong speech. Although Harris does not yet have the Democratic nomination, it is likely that she will soon be announced as the official Democratic candidate. Her late entry into the race certainly complicates the situation, but the polls do not seem to have changed much from when Biden was the Democratic frontrunner. A more detailed comparison of the two candidates' agendas, along with more debates, will provide more details. Trump is currently leading, but the election will be close.
Meanwhile, equity markets have also been on the move. In recent weeks, equity markets have mostly fallen. Increasingly high valuations of technology companies led to concerns and triggered several sell-offs in recent days. This was exacerbated by poor financial results from Alphabet and Tesla. Since 10 July 2024, the Magnificent 7 have lost more than 10%, wiping out $1.7tn in value in a matter of weeks. Figure 1 shows the fall of the Magnificent 7 alongside other major US indices, which also fell, but by a much smaller amount. The results of Apple and Microsoft in the coming weeks will be crucial in determining whether the current slide can be halted or accelerated. The S&P 500 and Nasdaq also fell significantly, again largely driven by the Magnificent 7 and other tech-oriented companies in the indices. The Dow Jones managed to limit the fall significantly, as part of the recent decline has been a shift from riskier tech stocks to more quality oriented companies.

Hedge Funds
Hedge funds had a great 2021 and managed to set a record high in its AuM. As of the third quarter in 2021, the AuM of the industry is expected to be between $4.3tn and $4.6tn depending on the sources. According to BarclayHedge, the industry’s AuM just surpassed the $4.5tn mark at the end of the third quarter. This is a steep increase from just $3.8tn in 2020, as shown in Figure 6. This is a gain of more than 18% in less than a year. It is expected that the number will rise slightly, once the Q4 2021 numbers are out, as October and November 2021 were rather positive. Nonetheless, December 2021 will have dampened the results of Q4 2021. Generally, the industry has gained substantially over the past ten years, despite a rather inferior view from market participants during most of that period. The AuM soared thanks to two reasons. Firstly, the industry saw substantial capital net inflows. During the first three quarters, the industry received $41bn in fresh capital after having received another $19bn in the second half of 2020. Since then, the industry saw net inflows in every quarter, which is stark break from previous years when the industry experienced net outflows in most quarters. In Q4 2021, net inflows rose to $81bn in 2021, according to Eurekahedge. Figure 7 also shows the severe initial impact of Covid-19 in 2020, when accounting for the significantly positive inflows in the latter half of the year. The second reason for the steep increase in AuM is due to the performance of the hedge fund industry in 2021. Hedge funds in 2021 returned slightly more than 10%, making it the third best year in history after 2020 and 2009 according to HFR. This is remarkable, as the year has not been easy with the constant uncertainty and high volatility in the market. In particular event-driven, equity and commodity strategies have performed very well and the high beta strategies within their respective sector. Figure 8 summarizes the performances of several strategies during 2021 by Eurekahedge. Distressed debt and event-driven strategies performed best with barely any negative performances during the year. Macro and fixed income strategies struggled the most throughout the year, due to the harsh economic conditions. When looking at the highlighted percentiles, it is evident that the high volatility in the market also caused high volatility in hedge fund returns, independent of the strategy. This is most relevant for long short equity strategies whose returns vary between +30% (upper percentile) and -10% (lower percentile) in 2021. Figures 9 to 13 highlight the SMC Strategy Indices in 2021 compared to their benchmarks. The SMC Credit Strategy Index gained slightly more than 5% in 2021, although the variation across strategies is substantial. Two strategies, Trade Finance Crypto and European High Yield L/S Credit did very well in the economic environment, as they reached returns above 12% and 19% in 2021. The Trade Finance Strategy is in particular remarkable, as the strategy has not experienced a negative month since its inception in 2017. The SMC Equity Strategy Index gained closely less than 10%, which is around as much as the average equity strategy in 2021. Within the sector, there was also considerable volatility, due to the sub-strategies. Unsurprisingly, the Equities US Activist Event-Driven performed best with a return exceeding 33%. More tech-focused strategies faced more issues but returned closely below 10% after an extremely successful 2020. Global macro strategies had a tough year and closed only slightly positive for the year. The SMC Global Macro Strategy Index is up almost 37% in 2021, which is largely due to the Discretionary Global Macro Strategy achieving a return of almost 70%. To nobody’s surprise, cryptocurrency strategies performed best in 2021. The SMC Cryptocurrency Strategy Index gained more than 212% in 2021. In the space, it was most important to hold a diversified account of cryptocurrencies to achieve such a great return, as Bitcoin (BTC) gained only 60%. The most successful strategies in the space focused on riskier tokens. The Token and Token Liquid strategies gained 295% and 385% respectively. Despite the great results of 2021, the gains are still inferior to the 342% in 2020. The developments in the crypto space will be discussed in a further paragraph. Lastly, another indicator that the industry is in a healthy state is the fact that the number of launches substantially exceed the liquidations and the number of active funds has reached an all-time high of 22,081.