​Markets are continuing to struggle in 2022. Equity markets have suffered substantial losses after their stellar 2021 caused by a combination of inflation, (expected) interest rate hikes and the Russia-Ukraine war. After the strong selloff at the end of April 2022 which closed the worst monthly performance since the financial crisis, equity indices are down substantially. The S&P500 is down almost 14% YTD while the tech-driven Nasdaq index is down more than 21%. The development of the S&P500 since January 2021 is shown in Figure 1 below. After its record high from the end of 2021, the index is as low as one year ago. Although equities are still high from a historical perspective, the anticipated, and very likely, interest rate hikes from the Fed are on the horizon. It is anticipated that the Fed will increase rates by 0.5% in May and possibly another 0.5% in June. This has a substantial impact on still highly valued stocks which will put further pressure on equities. Central banks are feeling the consequences of their extensive interventions during Covid-19. It led to record inflation levels (at least of the last 40 years), and the imminent treat of recession if interest rates are increased. Nonetheless, if interest rates are not increased, inflation could spiral out of control, if it has not already. Given that inflation has reached 8.5% in the US and 7.4% in Europe, the necessity to intervene is obvious. These difficult times are another opportunity for hedge funds to prove their worth, as they have since Covid-19. Despite losses of the industry collectively during Q1 2022, the industry still sees continued inflows. The difficulties from the uncertainties at the current moment make hedge fund selection more important, as the gap between good and bad hedge funds widened. Given the current market situation, equity-neutral, global macro and commodity-based strategies achieved great results. In particular our Discretionary Global Macro strategy had a phenomenal month with a gain of more than 50% in March and a gain of almost 150% in Q1 2022. Our crypto- and equity strategies did well in March 2022 and could partially offset their loss from earlier in the year. Nonetheless, this is unlikely to continue in April, due to the selloff in both markets at the end of the month. Another great alternative to be partially shielded to current market volatility is private equity and venture capital. Although both markets benefitted greatly from the overheated public markets in the past two years, valuations have declined slightly. Regardless of the decline in valuations, there is still a huge interest in the space as money keeps flowing in and the deal activity is very high in the space. The large amount of capital in the space alongside the competition are also likely to prevent such large decreases as the public equity markets see currently. Both of these markets, hedge funds and private equity, are large drivers of alternative markets. According to research from Goldman Sachs and Preqin, the AuM will significantly increase, even in a suboptimal ecosystem. In a grey-sky scenario, they expect the industry to grow to $14tn in 2026, up from $10tn in 2021. In a more favourable blue-sky scenario, they expect the AuM to rise to $31tn in the same time frame. Figures 2 and 3 show their findings.

​Aside from the continuous news about the ongoing war between Russia and the Ukraine, macro events are increasing after they have been halted when the war started. Central banks will increase the interest rates gradually over the year to combat the steadily rising inflation. After Powell announced at the beginning of the year that there will be many, but small, interest rate hikes in 2022, equity markets lost substantially. The first interest rate hike was expected early on but was postponed and again when the war started. Even though the war is ongoing, in mid-March 2022, the Fed announced the first 25bps hike. In a statement a week later, Powell showed a more aggressive stance to get inflation under control by outlining the plan of six further 25bps hikes in 2022, which will take place after each meeting. For May, he outlined that there is a high chance that the hike may even be 50bps. Figure 1 summarizes the expectations of the interest hikes in the coming year. These planned hikes pose a major treat for an inversion of the yield curve, as the spread between 2y and 10y notes dropped to only 13bps as of last week. On Monday, the 28th March 2022, the yield curve inverted as the yield on the 5-year notes rose above the yield of the 30-year note. In all prior Fed tightening cycles since 2000, the yield curve inverted. This is particularly relevant, as this was just the first of planned seven hikes this year and the decline in the spread between short- and long-term rates has rarely been that quick. As a sign of a recession, it remains to be seen whether this scenario unfolds against Powell’s view of a flourishing economy, due to increased interest rates. Figure 2 shows the previous yield curve inversions since 2000. Increased interest rates also increase the attractivity of bonds, as they will generate returns again. Since Covid-19 when interest rates were basically zero at all times, attractivity of bonds substantially decreased which led to soaring equity market as bonds were no longer viable alternatives. It also fuelled the commodity rally, as bonds did not provide an alternative to manage inflation concerns. This led to many commodities reaching all-time highs at some points since Covid-19 emerged. The interventions of central banks to mitigate the economic effects of Covid-19 have caused an extreme situation and most macro variables are at record levels, or at least at a record level of a long timespan, as shown in Figure 3. Inflation is the major concern for central banks in 2022, as, for example, inflation reached 7.9% in the US in February. Europe is not doing much better, especially given the context of steep increases months later than in the US. While the ECB is holding interest rates for at least until the latter half of 2022, the BoE has increased interest rates three times already in 2022. The latest hike came in mid-March 2022 and was the third consecutive meeting in which interest rates were raised by 25bps each which results in rates of 0.75%. This also makes the BoE the first central bank to set its interest rate to pre-Covid levels. Now, the tone in terms of a tightening policy has been reduced to balance the impact of inflation and the economy, especially because of the soaring gas and oil prices from the Russia-Ukraine conflict. Figure 4 shows a summary of the CPIs of the UK over the past year and emphasizes the steep increase in most measures. The BoE also adjusted its forecast upwards to an average inflation of 8% in Q2 2022.

​Russia’s invasion of the Ukraine certainly did not work as planned by Russia. They vastly underestimated the resilience of the Ukrainian people and the worldwide support they have received which included money, weapons, ammunition and even soldiers among others. The sanctions imposed by most countries also have hit Russia hard which supposedly is on the brink of defaulting. Russia has suffered substantial losses in the war and Putin had to impose severe measures to shield the Russian people from worldwide news coverage. The Russian government imposed a new law for news broadcasting which made nearly all international news stations leave the country. Moreover, Russia banned many Western internet companies similarly to China. Russians are facing the dire consequences of the war, as the country is starting to run out of certain goods as well as seeing significant price increases. Nonetheless, for Ukrainians the situation is even worse, as there have been more than 1,500 civilian casualties and more than three million already left the country. Due to the resilience of the Ukrainians and the sanctions from the West, it is questionable for how long the war can continue, as Putin is likely to face more pressure from the citizens of Russia. This leads to a dangerous situation, as Putin and Russia are likely to lose substantially even if they manage to take control of Ukraine. Putin threatened the use of nuclear warheads if the worldwide interventions should continue or the NATO would step in. This threat is especially concerning, if Russia’s defeat should become apparent, even from Russia’s perspective in which case Putin has “nothing to lose”. Amplified by the war, inflation is continuing to rise. In the US, inflation rose to 7.9% in February 2022, while Europe’s inflation increased to 5.8% and 5.5% in the United Kingdom. In order to combat this development, central banks started to raise interest rates this year. The Bank of England announced its second interest raise, while the Fed announced its first interest rate hike of 2022. Both banks are expected to increase interest rate several times in 2022. Oppositely, the ECB announced that there is still space before an interest rate hike is necessary and first interest rate hikes are expected in the latter part of 2022. Figure 1 shows a summary of several assets and their performance in 2022 which strongly differs across the assets. Top performers are commodities. Crude oil is up 35% in 2022 after being up more 65% earlier in March. Crude oil topped $130 per barrel at one point in March 2022 but substantially declined in value, as it was announced that supply will be increased. Since then, crude oil is hovering between $95 and $110 per barrel. Agriculture funds also gained substantially. Wheat was a major contributor to this development, as wheat doubled from the prices one year ago. Since its peak in March 2022, the asset lost around 10-15% in value. Gold is another asset that surged and regained its losses from the past year and is close to its previous all-time high from August 2020. Figure 2 shows a summary of the performance of selected commodities. Most profitable were the commodities that are reliant on the Ukraine and Russia. Russia is a key player in oil, gas and palladium, while the Ukraine is a large supplier of wheat. These assets have skyrocketed, while other commodities still increased but only slightly. Although the increases in gold and copper seem underwhelming, both assets are trading at record or close to record highs. Equities are a lot more volatile and the broad markets suffered a substantial loss once the war started and keep declining at a relatively stable pace. Nonetheless, the success is largely dependent on the industry. Unsurprisingly, energy stocks are doing incredibly well, as they are up 32% in 2022. Tech stocks face substantially more issues and are down almost 20% in 2022 so far. This development stems from the correction of the huge gains in 2020 and 2021 and their high upside potential which is great if the economy is stable. If the economy faces a lot of uncertainty, these stocks suffer most, as is evident in the current situation. Lastly, Bitcoin (BTC) that is frequently referred to as digital gold could not maintain this status, as it is down significantly since the start of the war. It experienced substantially more volatility than most other assets during this time. Since the first few days in 2022, BTC is continuously trading between -5% to -25% compared to the value at the beginning of 2022. The industry gained a couple of percentages following the EU parliament’s approval of a crypto legislation but quickly lost this gain again. Nonetheless, the asset class is well positioned in the current ecosystem, as inflation is still rising and institutional adoption has increased a lot. Currently, 99% of transactions in BTC are from institutions. The performance of cryptocurrencies currently largely favours the big and well-known cryptocurrencies. BTC and Ethereum (ETH) have lost relatively little over this time period, whereas many other smaller cryptocurrencies, e.g. Solana (SOL), dropped by more than 50% since the beginning of the year. This highly uncertain ecosystem also favours hedge funds. The AuM of the industry soared to a record $4.8tn at the end of 2021 and it is unlikely that interest will decline. In particular, macro hedge funds are posting huge gains and attract further capital. Additionally, due to volatility, more investors deciding to put money in hedge funds rather than stocks and bonds.

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.

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.

After an exciting time in early November 2021, the enthusiasm in markets faded quickly. The newly found strain of Covid-19, called Omicron, caused a minor shock to markets. Apparently, it seems to be milder than for example the delta variant, but it spreads even faster. Nevertheless, any conclusions on the virus strain are too early to be reliable. Omicron further worries European countries, as their number of cases has been surging regardless of the high vaccination rates. Many countries are imposing further restrictions, after some travel bans have been initiated. Those have not proven to be effective, as Omicron has been detected in most countries already. Among the strictest countries is Austria that has announced that the vaccination is mandatory as of early next year. Despite this rather grim outlook before Christmas, equity markets only took a slight hit. Figure 1 shows the value of the S&P 500 over the past three months. Even though Covid-19 is again a major topic, the drop was only minimal. Equity markets still had a stellar year. The S&P 500, for example, is up 23.4% as of the time of writing. The SMC Equity Strategy Index is up 10.7% in 2021 and gained remarkable 4.16% in October 2021. Major contributors were the strategies Long/Short US Equity Consumer, TMT, Healthcare and Long/Short US Equities Disruptive Technologies with 9.33% and 9.50% in October 2021. The situation looks a lot worse for oil. WTI crude oil lost almost all gains from the past three months, as shown in Figure 2. Oil prices fell from almost $85 per barrel to $66 per barrel. This strong decline stems from the fear of excess supply, if Omicron should lead to more severe restrictions, such as lockdowns. Regardless, oil still has come a long way from its negative value back in March 2020 when Covid-19 became problematic. At the current price of $66 per barrel, oil is up 33.5%, which is still remarkably lower than its previous peak of 67.0%.