THE DAILYALTS PLAYBOOK

May 19, 2020

DailyAlts Playbook: Hedge Fund Returns, Fed Testimony, Alts Investments, and a Hypothetical Day at the Office

PRIME OVERVIEW

Good morning,

If COVID-19 teaches us anything about humanity, it is this.

We sure can dabble in useless information.

On a day that the Dow rallied 900 points (Monday), things were fine in the trading world given my recent momentum interests in Trulieve Cannabis and Moderna over the last two weeks.

So, instead of watching CNBC for seven hours, one might – hypothetically – find himself watching Me, Myself, and Irene in the middle of the afternoon.

Again… hypothetically.

Then hypothetically find out that Jim Carrey and Renee Zellweger were engaged for several months at one point – and dig into all of those details for no apparent, hypothetical reason.

Then hypothetically start to read a lot about Jim Carrey’s career, and hypothetically learn how close he was with Rodney Dangerfield and how he would fail to land on Saturday Night Live multiple times.

Hypothetically, one might take interest in early Jim Carrey standup comedy from that point.

Hypothetically, one could then watch a few hours of his standup and outtakes.

One could if they have that sort of hypothetical time on their hands…

Then, hypothetically, one might start watching the absolutely insane documentary about the film Man on the Moon and watch Danny Devito freak out because Carrey had channeled Andy Kaufman.

Then, one might watch Man on the Moon and wonder why Carrey hadn’t even been nominated for Best Actor in that film.

Hypothetically, one would call this a very odd choice of Monday activities given the fact that one might be an economist who is trying to wrap his mind around why a single Phase One drug trial could send the bulls into euphoria and the Dow up 900 points…

But we’re so far down the hypothetical rabbit hole right now that it doesn’t require further headbanging.

Instead, one could call this the best day at the hypothetical office in months.

Now, let’s dive into today’s stories.

MORNING MOMENTUM

RISK-REWARD: We start today with the new reality of finance. As we’ve said time and time again, the 2020s will be a defining decade for alternative investments. Even as COVID-19 hammers the global economy, the desire for private investment and long-term focus will not go away. Yes, there are liquidity risks, but it is clear that investors are willing to accept them for higher returns, particularly in the low-interest rate reality that could sustain for a long time. According to a new report from Natixis, the bulk of institutional investors are moving to increase allocations to the Alts space. The report shows that 71% of investors say that higher returns outweigh liquidity risk. Roughly 63% say that higher gains justify higher fees.

EARNINGS NEWS: This morning, the markets are effectively flat as investors digest the latest round of earnings reports. Walmart Stores (NYSE: WMT) reported a massive surge in same-store traffic and e-commerce sales. The company already had a dominant position in the grocery business with the nation’s largest category market shareholder. By the time this is over, it’s hard to see how Walmart doesn’t have monopoly power over the grocery supply chain. Meanwhile, Home Depot (NYSE: HD) had solid sales during the Q1 season, but it had a big rise in spending to address COVID. These costs included more overtime, more bonuses, and other important safety measures to retain employees.

COVID CASES: We’re keeping tabs on the latest updates on COVID-19. Johns Hopkins University reports that the number of global cases has now topped 4.8 million, with 1.5 million of those cases happening in the United States. Russia has now become the second-highest nation in terms of official infections (we still don’t believe China’s numbers). Russia now has more than 300,000 cases of COVID-19 within its borders. The big news today is that the U.S. and China still remain locked in a battle of words over the origination of the disease. A day after China pledged $2 billion to the World Health Organization, President Donald Trump threatened to permanently cut off funding to the agency and withdraw U.S. membership if the group “does not commit to major substantive improvements within the next 30 days.”

ACCRUED INTEREST

FED FOCUS: Today, Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin will testify before the Senate Banking Committee. This is the first time that both men will update Congress on the $2.2 trillion economic package that the Senate helped to pass in March to address COVID. The questions today – from people with little understanding of economics and finance – is what else is needed to bolster the economy. Whatever Powell and Mnuchin recommend – even if it includes a fleet of helicopters for them to start bombing Americans with dollar bills – will likely receive a full rubber stamp. Last week, the Federal Reserve increased easing by another $215.2 billion – which probably incorporated about $37.5 billion in bond ETF purchases. That bond-buying program started on May 12, and it’ll be interesting to see how hard the market pulls back when the Fed shuts it off in – 2033?

PERFORMANCE: Hedge funds bounced back in April thanks to the COVID recovery. Here is a breakdown from the Preqin All-Strategies Hedge Fund benchmark, which returned 6.42% in April (it was -9.20% in March). YTD, the index is down about 5%. Top performing strategies for the month were:

• Event-driven strategies +8.11%
• Equity strategies +7.71%
• Macro strategies +4.31%
• Credit strategies +2.34%.
• CTAs +0.65%

The bounce back for hedge fund comes at the same time that Barclay reports that fund redemptions hit a staggering $85.6 billion in March. That figure comprised 2.7% of all hedge fund assets. Meanwhile, JPMorgan announced that it will shutter four ETFs that mimic the strategies of hedge funds. It’s part of a broader plan to shut down a number of different strategies across the liquid alts space.

RISK REDUCTION: Venture capital funding is now off 20% since the start of the crisis in December 2019. As we reported, China saw a 50% drop in VC activity in January and February. Now, the spread has pushed across Europe and the United States, stalling investment in new startups and technologies. The study: The Impact of COVID-19 on Global Startup Ecosystems’ by Startup Genome breaks down what has happened across the world.

WOES: Things continue to go from bad to worse for the airline industry. This morning, a new SEC filing showed that Southwest Airlines (NYSE: LUV) operating revenue for May could slump by nearly 90% from the same period last year. June operating revenue is expected to also fall from 85% to 90% due to the COVID outbreak. The firm did say that it is starting to see a small improvement in consumer demand and bookings.

QUOTE OF THE DAY

“We urge the U.S. to stop passing the buck and deepen international cooperation.” 

That’s Chinese foreign ministry spokesman Zhao Lijian responding to President Trump’s threat to cut off spending to the WHO and withdraw membership. This is very rich criticism from the foreign minister who has been peddling the debunked conspiracy theory that the U.S. military spread the virus to China during wargames and has done everything in his power to distract the world from the CCP’s behavior.

CARRIED INTEREST

Here is Tuesday’s reading list.

• Winners of the Post-COVID Rebound
• The Rich Get Richer
• Trump’s Capital War with China Ramps Up
• The Vultures are Swirling
• Asian Markets Look to Stabilize after Stimulus Surge
• ESG Integration and the Rise of Social Responsibility
• ESG as a Business Driver – is it Real?
• Real Estate: The Great Restaurant Replacement

SOCIAL RESPONSIBILITY AND THE DAILYALTS PLAYBOOK

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ABOUT THE DAILYALTS PLAYBOOK

Garrett Baldwin is the author of the DailyAlts Playbook.

An economist and author based in Naples, Florida, Garrett has an extended history of financial analysis, business journalism, public relations and consulting experience in hedge funds, private equity, alternative investments, housing policy, commodities, and public equity coverage. He holds degrees from Northwestern University, Johns Hopkins University, Purdue University, and Indiana’s Kelley School of Business. He also has a Certificate in Global Business from Harvard Business School.

An avid Baltimore Orioles and Buffalo Bills fan, he would prefer to discuss other sports, please.