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.

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.

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.

Hedge Funds
The hedge fund industry realized its highest gains of the decade, with an average return of more than 9%. Figure 1 shows the distribution of our hedge fund strategies, of which more than half of the strategies exceed a return of 10%. As the strategies performed differently across strategies in Q4 2019, it is interesting to have a look at Figure 2, in which is shown, how the different strategies performed compared to their benchmarks. The redemption trend continues but the amount redeemed continuously declined. However, investments in the industry also declines. Overall more redemptions than investments were offset by an organic growth of around 9%, resulting more or less at the same AUM as at the end of 2018. For 2020, we assume, that these trends continue. Investors may expect lower returns than previously, as the industry was unable to meet expectations in most years of the decade. Now, as equity markets are at record highs, it is unlikely that it continues raising at similar pace. As a consequence, we assume that there is a shift in strategies within the industry. This is further supported by the increased interest of Investors in ESG, which is rarely incorporated in the industry. Pensions funds are likely being more interest in hedge funds, as interest rates remain at a very low level. ​

Along with the shift in strategies, the pressure on the industry is tense, as the standard 2-20 fees are lowered more and more. We do see a tendency in the market with the highest quality managers with constant outperformance to be able to charge higher fees than 2-20 and attracting most of the capital inflows into the industry. Furthermore, there are so many funds, whereas only few manage the main stake of the AUM of the industry, implicating a consolidation trend And focus on developed manager outperform the benchmarks. With the good results in private markets, it is likely that cash is moved towards the private equity and debt industry, as the profit expectations of the hedge fund industry is likely to decline.

Hedge Funds
The industry had its best year since 2013 and the average hedge fund is up more than 9%. Especially the results, which were achieved in H1, are extraordinary. H2 was more volatile, in which equity strategies did very well, while e.g. macro and cryptocurrency strategies lost compared to their results of H1 2019. When considering the economic and political environment, these results are even better, as 2019 faced many uncertainties. Noteworthy are the debate about Brexit all year, the trade war between the US and China, the attack on an oil facility in Saudi Arabia as well as the recent assassination of Iranian general Soleimani, which may have further consequences. Nevertheless, our cryptocurrency strategy remains the

most profitable strategy this year with a YTD of 82%, followed by several equity strategies and our global macro strategy. Figure 1 shows the performance of our strategies compared to several benchmarks, whereas Figure 2 shows the returns sorted by hedge fund strategy.

The hedge fund industry performed strongly in 2019, as the industry achieved a steady gain of 9%, whereas several single managers beat the market and gained double digits. Despite those positive numbers, hedge funds still underperformed the equity market and the trend of the past years continues. In order to compete, hedge fund reduced their fees. In each of the last five years, more hedge funds have been shut down than launched. In total, more than 4,000 hedge funds have been liquidated in this period. 2019 was a good year, as all of our strategies yielded positive returns. Particularly strong this year were the equity strategies, especially in H1 2019 and towards the end of 2019. Furthermore, the tactical trading strategies performed even better until summer 2019, but faced losses at the end of 2019. Regarding the macroeconomic environment, the assassination of Iranian general Soleimani by the US and the counterattack of Iran on a US military base causes high uncertainty. The passenger plane, which got hit by a missile in Iran, further

increases tensions, even though the launch of the missile was likely unintentional. As a reaction of this newly escalated situation, safe haven assets, such as gold, which is now at a seven-year high, see increased demand. Similar developments were observed for Bitcoin. A cryptocurrency 2020 outlook is provided by BeQuant and a blockchain 2019 review and 2020 outlook is provided by Pantera Capital below.