The Long and The Short

Stocks posted their best month in over a year, with all major indexes gaining over 8%. Bond yields had their biggest monthly decline since 2008, fueling gains in stocks and speculative assets.

Hedge funds, especially equity long/short funds, have added value in recent months. Systematic equity strategies benefited from market volatility, while fundamental strategies lagged.

July featured an “Alpha Drawdown” for Equity Long/Short funds.

"This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning." Winston Churchill

Market structure once again fell apart. Low liquidity and too many participants caught on the wrong side resulted in losses for macro strategies.

The 2010’s featured a near zero risk-free rate, which impacted capital flows. With IRR assumptions tethered to free money, there was a seemingly infinite bid to unprofitable growth opportunities. Meanwhile, the real economy was adversely impacted by the distorted capital expenditure framework. Investors stretched for high returning investment propositions across venture, private equity, public growth equity, and public and private credit.

In our attached study, we provide data points and analysis about the current situation. There are clearly macro risks, but the selling in China and TMT sectors has hit extreme, global financial crisis levels, which should support TMT and China stock picking going forward, regardless of overall global equity market direction.

The markets are trading on a choose your own destiny path where naive relationships, like growth stocks to rising interest rates, cause the Nasdaq 100 and US interest rates to trade in lockstep. Actively managed investment strategies are caught in the cross-hairs. Sadly, the current status quo in markets can continue over the medium-term. Inflation pressures are cast away as transitory, while daily covid fear mongering seeks to keep people home and on the government dole. Bidding the S&P 500 higher, ordering Chinese takeout and binge watching a Chess mini-series appeals to many as an optimal pursuit. Market structure fragility however, remains the nasty undercurrent. Policy makers seek to quash market volatility, but the markets were pushed dangerously close to their breaking point on multiple occasions during the first half of the year. How long and by what means can policy makers keep it all together?

In This Issue: Our inaugural Volume 1 Issue #1 covers a broad range of topics including Q1 2021 hedge fund results, 2020’s hedge fund highlights as well as current market themes. The Fed, Inflation, Commodities, China, Retail flows and violent market rotations are in focus

The biggest surprise of Monday, March 29th was that it was not a September 2008 Lehman moment for the global capital markets.

No one is going to forget 2020, thats for sure.

On January 28th, 2021 GME Resources gained 20% on the Australian stock exchange………………………………….

Speculative conditions were omnipresent in November where the share prices of companies facing bankruptcy rose by 50% to 100%. Morgan Stanley observes that November 2020 was the worst "alpha" month for hedge funds since September 2019. HF underperformance accelerated into month-end but when the dust settled, hedge funds did in fact deliver healthy profits on an absolute basis.

That was easy. November delivered a "potential" transition of presidential power and strong developments on the vaccine front. Optimism and liquidity drove equities to their best monthly returns ever.

Hedge fund investors uniformly agree there are some positives to virtual hedge fund meetings, but the in-person Q&A sessions will be coming back. A shot in the arm will bring back a flurry of networking, meetings and hedge fund conferences. In the meantime, the hedge fund investment community will remain glued to their screens. However, as much as there is certainty for a surge of in-person exchange, the virtual meeting will be much more common in the future as well.

Q3 witnessed investor inflows to hedge funds for the first quarter in two years. Finally, investors are catching on to the fact that the good old days of the 2010s are over. 2020's market conditions characterized by elevated volatility, high intra sector and intra-asset class dispersion, are favorable for long/short hedge fund strategies and a bit more challenging for traditional long-only investment approaches.

Vaccine news took center stage yesterday, causing a monumental explosion in Value outperformance over Growth. While headline equity index performance is positive in November, some troubling cross currents are bubbling under the surface.

Hedge funds are having their best outperformance year in ages in 2020. Underneath the surface, this outperformance has engendered confidence in managers' portfolios given the elevated Gross/Net current levels.