Alternative Markets Update June 2019
June started in a more dynamic fashion for hedges funds are already recouped May’s losses. The anticipation of an interest rate cut this year as a result of Fed’s announcements resulted to a strong bounce back for equity markets. Equity hedge strategies profited the most during the first weeks of June, a month that so far is characterised by the trade war discussions and further tariff plans from US. Macro and CTA strategies had their bets right so far this month and they are waiting to capitalise on future volatility events. Bitcoin’s momentum slowed down in June and its price has receded from $8,740 to $7,900, reaching a market cap of $140bn. Ethereum had also a
slightly negative month so far and is keep following the same pattern as bitcoin.
Macro and Political Outlook June 2019 MacroEagle
Macro and Political Outlook April 2019 MacroEagle
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.
STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.45
The new era of presidency in the U.S. is marked with significant changes, with the Treasury Secretary announcing tax reforms in the next six months and the FED ready to increase rates. Hedge funds have momentum and they extended their January gains into February, with CTAs posting the biggest returns according to HFRX index. Equity hedge, macro and event-driven strategies exhibited similar robust performance and proving that they overcame last year’s underperformance and they gaze into the future with confidence. A Preqin survey evidence a large increase in the number of alternative investors and the performance of alternative asset classes is encouraging for the future of the industry. In debt markets, the risk retention regime leads to lower volumes in CLO issuance and fewer deals. There is an increasing appetite for private debt strategies and the economic outlook may suggest a growth in commitments over the next two years. There are more funds focusing on European credit, which is indicative of the opportunities in the space amid a relatively uncertain political scenery. Private equity fundraising continues in solid pace, while competition for deals is increasing rapidly alongside the number of funds in the market. Adding hedge funds, that compete for similar deals, makes the identification of opportunities even harder. Both private debt and equity strategies focus on the mid-market spectrum as the opportunities there are more attractive. The same scenery prevails in real estate industry with high prices and increased competition being the main feature. The investment activity slowed down and the macro outlook with interest rate growth expectations and political uncertainty are the most significant drivers behind the slowdown.
STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.42 MID JANUARY 2017
In 2017, a similar economic scenery is expected as during 2016 in an extension of the current economic cycle, and this year will be a transitory year towards a potentially unprecedented geopolitical and economic environment. This uncertainty will give rise to active investing and dynamic asset allocation with alternatives being the most attractive choice for investors. Trump’s election and Brexit belong to the past and the upcoming elections in Europe and the highly anticipated rate rises in the U.S. are going to attract a lot of investors’ attention this year. There are new risks on the horizon and investors are called to make wise choices regarding their allocations to avoid these risks and profit from them. Hedge funds have a bright outlook in 2017 after reversing the bad start in 2016 and finishing strong. The higher anticipated volatility in the markets creates opportunities for alpha-pursuing strategies across the major asset classes. Credit/fixed income strategies with short duration are expected to perform better in the space as most investors are looking for alternative income strategies such as direct lending or real estate debt. Emerging market debt enjoyed an amazing year 2016, but the rising U.S. dollar could make things worse for them this year, but there are still some very attractive opportunities. The forecasted U.S. economic growth, global inflation and a potential increase in bond yields will turn investors’ attention to sector-focused funds, systematic equity algorithmic strategies and niche strategies around U.S. equities. European equities could also offer investors with opportunities as there were outflows from European markets amid the turbulent political scenery. On the short-term, market neutral strategies could play an important role to every portfolio until the political scenery starts clearing out. Tactical trading strategies are the most exciting as volatility in the markets is about to surge, and volatility and CTA strategies are positioning themselves accordingly to profit from this environment. Discretionary Macro strategies have a ton of opportunities across asset classes with rates, currencies, commodities and emerging markets being the most lucrative. Finally, Bitcoin is expected to continue the rally it experienced in 2016 with major sovereign economies ready to accept it as addition to the U.S. dollar and a storage of value comparable to gold. The market capitalization of bitcoin is at an all-time high and bitcoin is competing fiercely and profitably with currencies and commodities as the best performing asset class during 2016. Fund of hedge funds struggled in 2016 and 2017 will make no difference as investors turn their focus to multi-strategy funds around credit and equity. Overall, there is a confident feeling on hedge funds with outflows to be limited and new investors ready to explore this asset class in their chase for uncorrelated returns. Private debt in 2017 will continue the momentum of last the years with increased deal flow and competition in both the sides of the Atlantic. The most intriguing feature of this asset class is the uncorrelated alpha generated combined with low volatility. In 2016 it outperformed both equites and credit. Volcker rule, Dodd-Frank, Solvency II, Basel III & IV, rising rates, risk retention rules deadline and central banks’ policies make the asset class extremely attractive. The asset class will attract more traditional fixed income investors as they are looking for alternative income strategies globally. Direct lending is the sub-strategy that will allure huge interest because it provides downside protection, access to attractive middle-market loans and a diversification effect to every portfolio. Direct lending in Europe is still an under-developed asset class and proper loan selection and sourcing could generate very attractive value, whereby investors should focus on sector and regional lending strategies. In private equity, there is huge demand for quality assets, but the struggle this year will be the high valuations. The volumes of PE transactions could increase due to the Volcker rule and investors are looking for best-ideas portfolios. The concept is similar to private debt in terms of opportunities as most European mid-cap companies have difficulties in accessing capital. Overall, 2017 appears to be an exciting year for alternative investments amid a very uncertain environment. The strategies that look promising this year are direct lending strategies in the U.S. and Europe, CTAs, global macro, volatility and bitcoin as we identify more space for opportunities.