Alternative Markets Review 2018
2018 started as strongly as it finished in 2017, but spikes in volatility caught hedge funds unprepared and highlighted the weaknesses of the industry. The rest of the year continued in the same pattern with major political risks adding to the problem such as Brexit outcome, European elections, end of quantitative easing and trade war. The fourth quarter and equities sell-off since October ruined hedge funds hopes to rebound and sank them deeper into their losses. Event-driven and equity hedge strategies were the worst performers among hedge funds, followed by systematic CTA and macro strategies. For our in-house strategies, the scenery was slightly altered as the worst performing asset class was tactical trading. Underperformance of cryptocurrency and CTAs are the main drivers of the underperformance compared to other indices, despite the strong performance of our global macro and market neutral strategies. Equities globally suffered severe losses, similar to the majority of our in-house strategies. Our niche equity strategies focusing on disruptive techno-
logies and directors' dealing though posted strong returns and constitute our best two performing strategies for 2018, consequently leading to a relative outperformance of peer indices. Direct lending and structured credit enjoyed a good year assisting in our credit index's outperformance. Only two out of eight strategies posted losses for a year, when equity and credit largely disappointed their investors. Overall, our cross-asset and single manager index posted losses for the year due to our tactical trading underperformance, but still performed better than the majority of the individual indices.
STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL.66
A recent PwC report showed that global assets under management are going to surpass $145.4 trillion by 2025, currently at $84.9 trillion. Investments targeting alternative asset classes will more than double to 21.1 trillion. Investors will be looking to pursue opportunities in established asset classes such as real assets, private equity, private debt (trade finance, peer-to-peer lending in particular) and hedge funds and in more niche markets including machine learning/systematic strategies and cryptocurrencies. In this perspective, we focus on cryptocurrency and systematic trading strategies due to the prevailing “phrenitis” of investors allocating to the space or being in the process of exploring the markets. In an earlier perspective, we examined the effects of adding bitcoin and systematic CTAs to institutional portfolios and evidenced the enhancement of the risk/return profile as both strategies have uncorrelated alpha features, desirable for investors.
Figure 1 highlights the growth of CTA and cryptocurrency (in particular Bitcoin / Ethereum) markets, which all stand at all-time high AuM, while still attracting interest and inflows from (institutional) investors.
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.