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.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.43 JANUARY 2017
2016 was a landmark year for the financial world because of a series of events that shaped a new reality. Last year was marked by major geopolitical events such as, U.S. elections and rumours about Russia’s interference, Brexit, Italian referendum, the Turkish coup, missile tests from North Korea and terrorism. These events combined with the low-interest rates environment in major developed economies and the continuation of monetary policies created a volatile scenery. Amid this environment, hedge funds performed well for their investors. After a disappointing beginning in 2016, they managed to turnaround the situation. Hedge funds got hit hard in the first two months of 2016 by the uncertainty about Chinese and other emerging market economies and by the drop in oil prices. The slow economic activity continued in February as the Brexit talks were intensified amid an underperformance of emerging markets, which led to volatility and losses in equities. CTAs were the only strategies performing well, but in March a reversal of this scenery was witnessed. Emerging markets resurrected, oil and commodities recovered, while the U.S. dollar lost to all major currencies. The increase in implied volatility and the tightening of spreads led to gains for relative value strategies in April, which was the month of some of the biggest pension funds’ exodus from the asset class. After that, a whole discussion was initiated regarding hedge fund fees and performance, putting more pressure on managers. During May and June, hedge funds were continuing their positive trend, still trying to recover from the poor first two months of the year, with Bitcoin rallying and being the biggest winner in the currencies war. July was the month of Brexit and when Germany became the second G-7 nation to issue negative yielding bonds. August was a quiet month, but September found investors worried about the policies in US and Europe, as FED members appeared to have dichotomous views and ECB alongside BoE continuing their QE practices. October found event-driven hedge funds in the top of the table in terms of performance, while CTAs found themselves in negative territories and the rest of the industry was trying to restore investors’ confidence and maintain their assets. The outcome of the U.S. elections in November created a sentiment of economic growth and structured credit strategies revived in the anticipation of deregulation. This outcome also benefited bitcoin, which enjoyed a rally in November and finished 2016 in an emphatic way with an increase more than 115% in its price overall. Meanwhile, direct lending and distressed debt strategies were attracting more and more institutional money in the hunt for yield from investors. The truly uncorrelated alternative income strategies are the solution to the yield problem and investors shifted from traditional fixed income strategies to alternatives. Deloitte’s Alternative Lender tracker noticed an increase in the deal flow in the private credit space and the momentum in 2016 favoured private debt funds, with the biggest brands in private equity creating private debt departments. Hedge funds completed their full recovery in December posting gains in a challenging year. They are preparing for an exciting year for active investing during 2017. According to Preqin, private equity buyout deals fell in 2016, with most of them being in the U.S. and then Europe was following. Alternatives had an interesting and challenging year and boosted their popularity amongst institutional investors, who are targeting to increase their allocations over the years to come.