Stone Mountain Capital’s Research Vol. 41

Originally published on 29 December 2016

2016 has been one of the most challenging years in the recent financial history with many geopolitical incidents affecting the global economy and its outlook. Brexit, the surprising outcome of U.S. elections, Italian referendum, immigration crisis, terrorism and the upcoming election in major European countries like Netherlands and Germany compose the turbulent environment and investors focus on managing an unprecedented situation. In the U.S., there is expectation for economic growth following Trump’s plans for increasing infrastructure spending and decreasing corporate taxes, while there is a widespread case for a rise in interest rates. In Europe, the center of attention is mainly the Euroscepticism of many countries and the implications of Brexit to the access of United Kingdom into the single market. Emerging markets enjoyed a very strong year, but the outcome of the U.S. elections is raising concerns amongst EM investors who are watching US ready to cancel or renegotiate their trade agreements. Hedge funds during 2016 gained a lot of attention for their performance, the high fees and the exodus of some big pension funds from the asset class. Despite this negative environment, hedge funds managed to turn around the situation and finish positive this year with the event-driven and distressed restructuring strategies leading the way with huge gains. Equity-focused hedge funds remained flat as per the HFRX index, while Macro and CTA strategies were a disappointment despite their solid start in the year. Volatility strategies also gained from this environment alongside market directional strategies. Stone Mountain Capital’s mandated managers’ top performing strategies include cryptocurrency, CTA, volatility, small-cap US equity and Macro, which opposes the mediocre performance of the hedge fund universe. Private lending strategies continued their rise against traditional banking with the deal flow moving away from banking. The other two core strategies in the private debt space: distressed debt and mezzanine continue to perform well and to attract institutional focus and the three of them constitute the most attractive asset class in terms of opportunities in the yield hunting process. As soon as the landscape clears regarding European’s Union future, private debt marks are expected to grow more with the focal point being alternative lending in the lower middle market space, where corporates do not have flexible and easy access to capital. On the private equity side, the increased level of prices raises concerns to investors who are looking for higher returns in a very competitive environment where they have to compete with hedge funds and private debt funds occasionally. The macro outlook for the asset class remains the same with its peers as everyone is looking for a more stable political and economic climate. Buyouts is the leading sub-asset class where investors are allocating, with mezzanine debt also experiencing a big increase. The demand for alternative assets amid the prevailing equivocal conditions expands to cryptocurrency, with bitcoin experiencing a huge rally and beating all the major fiatcurrencies and other investment asset classes this year. The expected changes in policies and regulations distinguish bitcoin as a truly uncorrelated asset class which can play a hedging role in every portfolio while keeping a huge upside potential. With the price being close to $925, a nearly 115% increase since last year, bitcoin continues to gain more attention from institutions. 

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