Alternative Markets Update September 2020
Last week, tech stocks have experienced the first major loss since the start of the pandemic, after which they recovered enormously fast and reached new record levels. The recovery was mostly caused by the financial stimuli of central banks and the shift from companies to home office and similar reactions to the pandemic. Figure 1 shows the debt-to-GDP levels in 2020 and a projection of 2030. It is expected that all those will fall going towards 2030, except for the US. UK and France will likely remain at the level they are currently. Japan is currently by far at the highest level with also reaching a level of 250. One of the big topics is inflation, due to unprecedented money printing around the world, but especially in the US. Figure 2 shows the historical inflation since the global financial crisis in the US. The average during this time of the headline and core CPI are 1.6% and 1.8%, while they are currently 1.0% and 1.6% after their substantial fall when the crisis emerged.

AUGUST PREVIEW. The most exciting week this month is clearly the first. We get to know Biden’s pick for VP (more below); I do expect the ECJ’s answer to the German Constitutional Court and we will see the next tranche of the US relief package agreed before Congress breaks for its summer recess. In the second week, as usual, we get a lot of economic and sentiment data – the rate of change being more important than the number itself. As for the last two weeks, the main calendar focus will be the virtual Central Bank symposium at Jackson Hole. Spoiler alert: August has a real bad reputation for nasty equity sell-offs. Increased US-China tension (on the back of the US presidential campaign) is probably my No1 pick for “possible trigger” (more below).

The SMC equity strategy index is up 5.94% in 2020 and outperformed all of its benchmark indices by more than 5%. The credit strategies were suffering and just recovered from their level of end 2019. The SMC tactical trading strategy index did very well in this turbulent environment and is up more than 20% in 2020, whereas most benchmarks are between -4% and 3% except the HFR cryptocurrency index. Our fund of hedge fund strategies were struggling as well and are still down 0.41% for the year, despite their outperformance of benchmark indices. The SMC cross-asset and single manager indices are up more than 5% in 2020. The best performing individual strategy is Discretionary Global Macro, which is up approximately 40% in 2020, despite a loss almost 10% in June 2020. Similarly, the best performing equity strategy is Market Neutral Equity US Algo with a YTD of 27.89%. 

Further equity strategies that performed very well are Long/Short US Equity Consumer, TMT, Healthcare with a YTD of 26.76% and Long/Short US Equities Disruptive Technologies with 25.90% return in 2020. Further details are found in the table below the summary of H1 2020.

Alternative Markets Update May 2020
​The current crisis caused a huge spike in uncertainty. Figure 1 shows the VIX closing price and the VIX futures as measures of volatility in the market. Prior to the crisis, the index remained stable between 10 and 25. After the initial outbreak in Italy and as it began to spread rapidly, it spiked to above 70, while the futures exceeded 80 at one point. Since the spike the index has steadily declined and is now back at 30, as the virus outbreak is mostly under control now, but there is still a substantial fear of a second wave that might hit, if no vaccine is found. The scenario that a vaccine is developed prior to the possible second wave is highly unlikely, as many from health care industry claim that a vaccine will be available earliest in the late autumn and even more claiming that there will be no vaccine until 2021. The second wave however is likely to appear in autumn or if reopening measures are executed too fast.

Figure 1: Comparison of VIX Closing Price and VIX Futures Within the Last Year, Source: CBOE, May 2020

As a consequence of volatility, the gold price rose substantially. The gold price continuously increased over the last year, as visible in Figure 2. It started with the trade war between the US and China, which drove gold prices up until the virus induced crisis started, at which point it accelerated its gains. After the virus had spread in many developed countries, an unprecedented day occurred, at which all assets fell, even though the reasons were different. For gold, it was due to the fear of not enough supply being available. After this fear had perished, gold started rising significantly again, especially as the Fed and other major central Banks started printing huge amounts of money, which raises the fear of inflation. As gold is an inflation hedge, it rose even further, leading to the projection of the Bank of America that gold’s target price is $3,000.

Figure 2: Gold Performance Within the Last Year, Source: Barron's & Market Data Group, May 2020

Hedge Funds
The hedge fund industry started with a record AuM of over $3.3tn to the year 2020. January and most of February looked promising, as the market continued its bull run of the last ten years with some minor exceptions during this time period. After covid-19 hitting Western countries, hedge funds have started to suffer. In sum, hedge funds have experienced the second worst quarter in history after Q3 2008. However, when looking at monthly returns, March 2020 exceeds the losses of any other month during the financial crisis when looking at average performance. Figure 2 shows the last 12 monthly returns and the previously worst month in the financial crisis, October 2008. As of 29th April, the AuM of hedge funds, which was higher than $3tn since 2014 dropped below this mark for the first time totalling $2.95bn. Despite the substantial inflows during January and February, the net flows within 2020 are negative now. Only relative value strategies and green funds have managed to generate net inflows this year. The performance of strategies in the hedge fund industry greatly varied, as crisis strategies, such as long volatility and tail risk are up 35% and 27% YTD, despite being the worst performing strategies in the last seven years. Equity hedge strategies, which have performed great during the last years, were hit hard, as equity long bias and long short bias are down 20% and 10% YTD. Debt funds were hit equally, as distressed debt is down 12% and fixed income is down 8% YTD. Most of the other strategies lie within a range of -10% to +5% YTD. Figure 3, and Table 1 respectively, show the returns of our indices compared to their benchmark indices.

As described previously, the majority of equity and debt strategies yielded negative results, so did our strategies with a few but notable exemptions. In equities, our market neutral US equities algo strategies is up 30.74% YTD. The remaining positive equity strategies are between +1 and +4% and focus on being long and short in US equities. However, as a whole, equity strategies are down 7.22% in March and 5.47% YTD, which compares well to the benchmarks shown in Figure 3. Our debt strategies were hit. Two out of seven strategies are slightly up in 2020, while two strategies returned substantial losses. Our debt strategies collectively performance approximately in line with benchmarks in 2020. Our tactical trading strategies performed very well in Q1 2020, as they are up 15% YTD collectively. This is exceptional, as only two of our six benchmarks are up, and those are only slightly up. The discretionary global macro strategy has realized a net return of above +50% YTD. The fund of hedge fund strategies performed around what an average hedge fund achieved in 2020 with a loss of around 8%. Our cross-asset indices, indices based on all of our strategies, are slightly down in 2020 with 2% and 3% in total.