Stone Mountain Research Perspective Vol 43

February, 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.

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

2016 is over and was a challenging year, full of surprises, where hedge funds struggled with brand-name hedge funds counting 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, and the sixth one being a short volatility strategy. 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%. The other strategies that lie in the 5%-10% region are equity 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 nice strategies focused on volatility, macro and directors dealing performed astonishingly well, with cryptocurrency strategy outperforming the rest by far, exploiting bitcoin's crazy rally end of last year.

**Stone Mountain Capital In-House Indices vs. Major Benchmark Indices Hedge Funds and Long Only As Per Full Year 2016, 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. And both strategies performed better compared to their traditional and alternative investment peers. The best performance in terms of returns was achieved by tactical trading strategies, which are represented four times in the top-5 performers’ table. 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. Our fund of hedge funds 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.