Alternative Markets Update H1 2019
After the difficulties for hedge funds in 2018, 2019 started strong, despite the current uncertainties, such as the Brexit, the European elections and the trade war. Only in May, there were some difficulties. This short downturn was offset and more than compensated in June, which yielded extraordinary results. Our best performing strategy was the cryptocurrency strategy, followed by US equity disruptive technology and US equity high conviction. The best performing asset class was tactical trading, which achieved a 30.78% YTD, as shown in figure 1. Furthermore, all strategies had positive return in H1 2019.
Hedge funds started 2017 under pressure and the overall industry’s model was in question. Performance and fees were the main topic of debate among investors at the beginning of the year, but hedge funds managed to pull a strong year with no down month. Despite losses from some large managers, the industry overall generated strong returns according to HFR data attracting more capital. Per HFR, total hedge fund industry AuM increased by $59bn to $3.21tr, the sixth consecutive quarterly record for total industry AuM. The inflows suggest a sign of regained optimism, but the industry will need to sustain its performance long-term in order to regain its calibre. The oxymoron of the industry is the fact that equity hedge were the best performing strategies amongst hedge funds but suffered the biggest outflows. Macro, CTAs and multi-strategy attracted more capital this year, and given the outlook for more volatility and less central bank intervention, investors target further allocations in those sub-sectors.
Stone Mountain Capital Strategies
2017 was the year producing the strongest return for hedge funds since 2013 and second best since 2009. Stone Mountain Capital strategies outperformed in last year’s environment across all asset classes. Credit was the only strategy underperforming its peers, caused by yield compression in the direct lending space. One, out of only three negative strategies was in credit, while the other two, were CTAs that struggled amid the low volatility and trendless environment. Despite these two strategies, tactical trading was overall the best performing strategy with strong returns generated by discretionary global macro and cryptocurrency. Equities enjoyed a very profitable year and Stone Mountain Capital’s mandated equity hedge managers produced astonishing returns, beating their traditional and alternative peers. Finally, fund of hedge funds recovered from their 2016 losses, surviving while the industry’s model is evolving.
Figure 3. Stone Mountain Capital In-House Indices vs. Major Benchmark Indices Hedge Funds and Long Only in 2017, Stone Mountain Capital Research; SMC strategy indices are not investable products but are used as indication of our managers' performance and are calculated with the equally-weighted method.
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.47
Bitcoin is enjoying a plenty of attention lately due to the rally in its price driven by its usage as frictionless payment solution and the catalyst: the ambitious plans of the Winklevoss brothers to launch the first bitcoin ETF. Friday, 10th March though was the day that SEC rejected the brothers’ ETF application, which could have been a ‘revolution’ for the digital currency in the investment space, like the first Gold ETF, due to the anticipated inflow of new institutional capital. The same day, after the ETF disapproval, the price of Bitcoin plunged to levels around $1000, which constituted an almost 18.5% decrease intraday. Bitcoin price recovered immediately and currently trades around $1230, proving that the drivers of demand for the digital currency are strong regardless of the launch of an ETF. We are living in the age of the machines, where investors are looking for fintech, artificial intelligence and machine learning supported products to source uncorrelated alpha for their investment portfolios. This perspective will examine the Bitcoin and CTA market to analyze its effect on investors’ portfolios.
There are hundreds of different cryptocurrencies, but only two managed so far to distinguish themselves and establish a market. Bitcoin is the most capitalized with current market capitalization being around $20bn. Ethereum, its only relevant peer so far, has a market cap of around $2bn. Bitcoin is the main player in the cryptocurrency spectrum and its growth is significant over the last 3 years. Since 2014, $15bn of new capital has boosted the growth of bitcoin as a new asset class. CTA AuM has risen by $22bn since 2014 and is currently at an all-time high of $340bn, proving that machine related strategies are here to stay while attracting new capital allocations.
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.