Hedge funds are doing great in 2021. Hedge funds’ AuM has surpassed the $3.8tn mark in March 2021, which is backed by several reasons. The more negative view on hedge funds over the last five years have subsided, since they have mitigated the financial impact of Covid-19 and posted strong performances afterwards. This boosted the AuM through the performance as well as additional inflows caused by the good results. This is very likely to continue, since hedge funds have had their best Q1 return for more than two decades. Alternative investments in general did very well. Private equity was slowed down initially by Covid-19, but their recovery returns were extremely strong. The high valuations on the stock market certainly helped to achieve this return. Private debt did well too, although their initial recovery was slower. But due to the favorable interest rates, private debt seems attractive compared to public debt. Commodities are doing well too, especially considering their relatively bad performance over the last decade. Gold gained significantly since 2019, which was further boosted by the money printing following Covid-19 and surged to a record of $2k per ounce, but since then, it lost again and has been very stable at around $1.7k over the last months. Oil, which was hit very hard during the initial Covid-19 reactions, has reached its level prior to the crisis and continues to reach higher prices. Just in the last month, WTI crude oil gained more than 10% and is currently at $66 per barrel. Industry metals also have gained substantially in 2021 and due to their demand, it is likely that this will continue. Cryptocurrencies have gained again over the last two weeks. Bitcoin (BTC) was not that specular, as remains between $50k and $60k, despite dropping quickly below the $50k mark. Nevertheless, BTC is still up 91% in 2021 and its market cap remains above $1tn. The big mover was Ethereum (ETH), which was around $2,500 before its surge starting in early May. It peaked above $3,400 and is currently at $3,350. ETH is up 349% in 2021 and almost has a market cap of $400bn. Figure 5 shows the ETH price (in green) from 2020 onwards and its value in BTC (yellow line). During 2020, the two coins moved similar, but since 2021, ETH is outperforming BTC substantially. At the end of 2020, ETH was worth less 0.03 BTC, whereas now it is worth more than 0.06 BTC per coin. Other altcoins followed ETH, but not to same extent. Thus, the crypto market, of which 70% was BTC in 2020, known as “Bitcoin dominance” is shrinking. Currently, BTC only accounts for 45% of the market capitalization of the crypto market.
Alternative Markets Update March 2021
In the current uncertainty in the markets, macroeconomic factors play an important role aside from Covid-19 and the vaccination efforts. Inflation is a major concern in 2021, even though it was very obvious in 2020 already. However, in 2020, it was completely overshadowed by Covid-19 and the tremendous surge in equity markets among others. Inflation is a concern around the world, caused by the severe interventions undertaken by central banks. In particular in the US, where the FED intervened with money printing on such a scale that it cannot be compared to any other economy. This was largely required, as conventional monetary policy was not enough, for example, lowering the interest rates to the area around 0%. Even quantitative easing could not solve the problem, even though the FED’s balance sheet ballooned. Figure 1 shows the FED’s balance sheet over the last five years. At the beginning of the crisis, the federal reserve was at around $4.3tn. In 2020, this increased by 76% to $7.3tn and is still rising in 2021. Currently, it is at almost $7.7tn. In comparison to 2008, during which the federal reserve increased by 151%, the balance sheet increased by “only” $1.3tn in absolute terms. It is important to note that during the last two decades, the FED’s balance never declined by more than 1% on an annual basis with one exception being 2018 with a decrease of 8%. Interest rates in the US have recovered quite spectacularly over the last months. Figure 2 shows the development of interest rates in major economies over the last few months. The US interest rates are higher than any other interest rate from the UK, Europe or Japan, both short- and long-term. The short-term interest rates have remained very stable, while the long-term rates have increased a lot, for example, the 10-y US treasury note is soon back at 2%.