Stone Mountain Research Perspective Vol 44

Originally published on 15 February 2017

The new year started with lots of expectations for hedge funds and so far they live up to them, having a solid start in the year, which is extended in the first weeks of February. Systematic CTAs followed by equity hedge and macro strategies are leading the winners' list, as the major HFRX indices find themselves in "greens". Despite the outflows last year, the AUM is still at an all-time high and is expected to grow from $3.2tn to $5tn according to a PWC survey over the next 5 years. In case the performance keeps its momentum, then the asset class will retrieve their lost calibre and will attract again institutional attention and assets. Another asset class that keeps exceeding investors' expectations in terms of performance is private debt. According to Preqin, the majority of investors are looking to increase their exposure to private debt strategies. Direct lending strategies, offering alternative income amid a low-yielding financial environment, are the front runners in asset raising. In the private equity space, the industry is growing alongside dry powder, and makes competition among managers extremely high in identifying opportunities. The trend of private equity shops establishing private debt departments to exploit and explore opportunities is expected to continue as the deal flow increases constantly. According to Landmark Partners, a record number of real estate secondaries was evidenced during last year and the transaction volume experienced a massive increase. Real estate is evolving to an interesting asset class due to its illiquid profile and its robust returns over the last years and it is expected to grow more as more money is poured into alternatives. Finally, bitcoin rebounded during the first two weeks of February after a decline during January. A lot of countries hold a positive stance towards bitcoin, while the number of transactions and the market capitalisation are continuously increasing.

2016 was a challenging year, full of surprises, where hedge funds struggled with some brand-name hedge funds delivering double-digit negative losses. Six out of the thirty-four Stone Mountain Capital's strategies were negative, with five of them being on the fund of hedge fund bucket, indicative of the bad year fund of hedge finds had. Large Cap FoHF, Tactical Trading FoHF and Discretionary Macro FoHF managed to achieve between 0% and 5% alongside global equity and market neutral US equity strategies, two CTAs, and finally a structured credit strategy. The majority of credit/fixed income and the market neutral CTA strategies yielded between 5% and 10%, with the direct lending strategies touching the higher bound, apart from one which finished slightly above 10%. Other strategies in the 5%-10% region are equity hedge focussed strategies in the U.S. and Japan. The global emerging market debt strategy enjoyed a very profitable year after the reversal of the scenery in the emerging markets, finishing just below 20%. Long-only US small-cap equities and discretionary global macro were the other two strategies that performed between 15% and 20%. Small and niche strategies focused on volatility, global macro and directors dealings performed astonishingly well, with the cryptocurrency strategy outperforming the rest by far, exploiting bitcoin's year end rally.

Distribution Stone Mountain Capital’s 34 Hedge Fund Strategies As Per Full Year 2016 Returns, Stone Mountain Capital Research

With 2016 being already in the past and with 2017 looking bright for hedge funds and rest alternatives, the in-house strategies that attracted the most attention are tactical trading and credit/fixed income, as they enjoyed a profitable year. Both strategies performed better compared to their traditional and alternative investment peers. The in-house credit strategy evidence annualised higher annualised returns with lower volatility than long-only and hedge fund credit indices. The best performance in 2016 in terms of returns was achieved by tactical trading strategies, which are represented four times in the top-5 performers’ table. The annualised returns achieved by our in-house managers are significantly higher than its group peers but with significant higher risk as well. On the credit side, direct lending, CLOs and emerging market debt enjoyed a solid year and provided investors with better returns than hedge funds in fixed income space and long-only indices. The same scenery dominates in the tactical trading space, where our mandated strategies outperformed every index. The in-house equity strategies performed better than their peers in the alternative space, but defeated to the S&P500. Equity strategies achieve higher annualised returns with higher volatility than the rest hedge fund indices, but winning the S&P 500 as they evidence lower volatility and higher returns.  Our fund of hedgefunds are the worst performers, losing to it peers and being the sole negative strategy. Overall, the single manager cross-asset index achieved better than every other index in the above table, apart from the SMC tactical trading. The SMC cross-asset index performed worse than the single manager index due to the poor performance of fund of hedge funds this years, but still positioned itself as the fourth best performing strategy in term of returns. The SMC Single Manager Cross-Asset Index and the SMC Cross-Asset index have the second and third highest annualised return respectively, while having the fourth and fifth highest annualised volatility respectively.

Stone Mountain Capital In-House Indices vs. Major Benchmark Indices Hedge Funds and Long Only As Per Full Year 2016, Stone Mountain Capital Research.

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