May 2020

SGA Whitepaper

RIDING THE VOLATILE WAVES

HEDGEFUNDS

wwwsganalyticscom

2

SGA Whitepaper | May 2020

Impact of COVID-19 on hedge funds

Will the recovery persist

Volatility friend andor foe

Is there a silver lining

Fortune favours the ldquoprudentlyrdquo brave

Hedge funds ndash survival of the fittest

1

2

6

3

4

5

3

4

10

6

7

8

CONTENTS

wwwsganalyticscom

3

SGA Whitepaper | May 2020

IMPACT OF COVID-19 ON HEDGE FUNDSThe last two months have been tumultuous for investors as clouds of volatility loomed over otherwise shining markets With the coronavirus (COVID-19) pandemic breaking all geographical barriers and smearing the world with its impact global institutions that were once concerned only about how emerging markets will battle this pandemic saw an unprecedented number of infections and deaths in some of the most influential and developed western world countries The crisis in a way has become a great leveller with markets across the world braving the same battle

All major equity indices worldwide had begun to melt since mid-February as COVID-19 started to spread across countries in Europe followed by the US Global markets plunged quickly by mid-March with FTSE Nikkei and SampP 500 losing close to 30 of their values during the period However in the past one month markets have rebounded to a great extent Surprisingly the SSE Composite Index remains one of the most resilient of the lot and has witnessed the least volatility year to date (YTD) China the global manufacturing engine already started its economic activities as Wuhan declared itself free from COVID-19

That said the reasons of the rebound need to be examined In developed countries the market recovery seems to be driven by strong financial support from central banks and governments rather than any amelioration in the pandemic situation The Fed cut lending rates by 150bps in just two tranches in March The US government has followed suit and announced a stimulus package of USD 2tn on 25 March to mitigate the economic impact of COVID-19 In Europe the UK government has announced a GBP 330bn package on 17 March and the next day European Central Bank (ECB) announced EUR 750bn coronavirus stimulus Clearly unlike the 2007-08 global financial crisis (GFC) capital markets are now flush with liquidity

3

Source Yahoo Finance SG Analytics

Global indices off their lows ndash as fiscal and monetary interventions kick-in

120

110

100

90

80

70

602-Jan 21-Jan 9-Feb

Shanghai composite

3 Mar 50bps rate cut by FED

15 Mar 100bps rate cut by FED

1 Apr US crossed 200000cases

8 Apr Japanrsquos USD 22bn package toshift production out of China

25 Mar USD 2tn stimulusannounced by US government

18 Mar EUR 750bn stimulusannounced by ECB

17 Mar GBP 330bn packageannounced by UK Government

24 Jan China surpassed 1000COVID cases

3 Feb Chinese trading restartsafter 12 days break 27 Feb China crossed

78000 cases

Nikkei FTSE SampP500 NASDAQ

28-Feb 18-Mar 6-Apr 25-Apr

Global indices

wwwsganalyticscom

4

SGA Whitepaper | May 2020

WILL THE RECOVERY PERSISTThat brings us to the next question if valuations have corrected are corporate earnings reflecting this Apparently not The SampP 500 Index has corrected ~20 from the latest peak of 3386 achieved on 19 Feb but 1-year rolling forward EPS estimate for the index has been revised down by only 10 Comparing this to the actual EPS of USD 163 for 2019 the 1-year rolling forward EPS estimate is down just 55 The SampP 500 composite index is currently trading at its highest PE ratio since the GFC

SampP valuation remains high

Given the continuing uncertainty related to the pandemic which is further exacerbated by the oil glut one could well argue that there are further headwinds on the way to sustainable recovery Latest macroeconomic projections and data releases such as the IMFrsquos GDP forecast US jobless claims etc all point towards a testing time for the markets at least in the short term According to the Wilshire 5000 Total Market Index the total market capitalization to GDP (sometimes referred to as the Buffet Indicator) is still substantially higher than the peak of last cycle Prior to the GFC at the end of first half of 2007 the indicator was at ~110 when the index was at its highest since the dot-com bubble By the end of Q1 2009 the market plummeted and the indicator almost halved to ~56 Since then the indicator has been rising steadfastly with minor corrections en route Value investors would hence question the optimism behind the recent significant rebound in financial markets

3500

3000

2500

2000

1500

1000

500

Apr-07 Apr-08 Apr-09

SampP 500 COMPOSITE-PRICE INDEX SampP 500 COMPOSITE-12M FWD PE Average PE

Average - 149x

188x

130x

89x

190x

170x

150x

130x

110x

90x

70x

50x

192x

Apr-10 Apr-11 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20Apr-12 Apr-13

SampP 500 Index vs 12M FWD PE

wwwsganalyticscom

5

SGA Whitepaper | May 2020

Source CCN FRED Global Macro Monitor

1600

1400

1200

1000

800

600

400

200

00

1989

1990

1991

Recession

Q1 2000

Q1 2009

14292

11076

7072

5636

Mar 23 202010532

Q2 2007

Q2 2002

Wilshire 5000GDP Feb 19 2020 ATH15824 (e)

Value Zone (LHS)

April 17 202013776 (e)

1992

1993

1996

1997

1998

1999

200

0

200

1

200

2

1994

1995

2003

200

4

200

5

200

6

2017

2018

2019

2020

200

7

2010

2011

2012

2013

2014

2015

2016

200

8

200

9

Stock market capitalization to GDP - Wilshire 5000 Total Market Index

wwwsganalyticscom

6

SGA Whitepaper | May 2020

As far as the capital markets are concerned periods of uncertainty generally foster volatility and while unnerving for some it could also provide both short term and long-term opportunities Yes their active management skills would be tested - but this situation provides a great stage for active managers to prove their mettle

Actively managed hedge funds by the very premise of their name are expected to provide return in excess of their respective benchmarks and protect capital of the investors in times of turmoil For instance macro hedge funds focused on currencies interest rates and commodities have withstood in this market capitulation Socieacuteteacute Geacuteneacuteralersquos CTA indices are in positive territory in April after a flat March emphasising the CTAsrsquo ability to generate lsquocrisis alpharsquo According to Forbes Alan Howardrsquos all-important Brevan Howard hedge fund significantly outperformed the market and returned 23 in Q1 2020 Similarly Andrew Lawrsquos Caxton Global Investment macro hedge fund returned 72 YTD as of 27 March according to an HSBC survey of hedge funds On the other hand Robert Gibbinsrsquo Autonomy Capital Ray Daliorsquos Bridgewater Associates the worldrsquos largest hedge fund fell 20 and 16 respectively in March 2020

Looking ahead quality launches are expected to continue According to NY Times eight or more European hedge funds are introducing portfolios based on the underlying theme of revival of corporate debt and emerging markets in the post COVID-19 world According to reports from Thomson Reuters industry interaction suggests that seven hedge funds with mandates in credit and equities are in various stages of new portfolio launches since the beginning of March 2020 According to HFM industry observers believe 2020 should see the number of new hedge fund launches at least match those in recent years (15 in H1 2018 and 21 in H1 2019)

VOLATILITY FRIEND ANDOR FOE

9000 600

500

400

300

200

100

8000

7000

6000

4000

5000

2000

3000

1000

1-Aug-19 1-Sep-19 1-Oct-19 1-Nov-19 1-Dec-19 1-Jan-19 1-Feb-19 1-Mar-19 1-Apr-19

SampP 500 Volume (mn)CBOE VIX (LHS)

CB

OE

VIX

Volu

me

(mill

ion

)

SampP 500 Volume vs CBOE VIX

- -

wwwsganalyticscom

7

SGA Whitepaper | May 2020

HEDGE FUNDS ndash SURVIVAL OF THE FITTESTThat said while continued high-quality launches are encouraging the overall number of hedge funds has been declining and there is a growing fear that smaller hedge funds (with less than a billion dollars in assets under management or AuM) might be at risk of survival In addition it is not so easy to grow AuM hedge funds have witnessed net outflows in 13 of the past 17 consecutive quarters according to data from Financial Times Healthy financial markets kept the overall AuM at around USD 3tn despite number of funds shrinking for the past few years However end clients continue to question the ldquo2 and 20rdquo fee structure as returns have failed to impress Consequently the hedge fund industry has conceded some of the AuM to private equity industry in 2019 AuM of the hedge fund industry lagged private equity peers by ~20

In Q1 2020 the AuM of the hedge fund industry have gone below USD 3tn for the first time since 2014 reflecting redemptions and performance declines according to eVestment hedge fund asset flows report The report puts the industry AUM at USD 2949bn In March 2020 heavy outflows of USD 2413bn more than offset the positive flows in Jan and Feb causing net outflow of USD 795bn YTD

Source Hedge Fund Research (HFR) FT The Economist Preqin

10

6

8

2

4

0

2000 2005 2010 2015 2019

Number of hedge funds globally (000)

Funds have fallen for five consecutive years

4

2

3

1

0

2009 11 13 15 17 19

Hedge funds

Private equity

Asset under management $trn

wwwsganalyticscom

8

SGA Whitepaper | May 2020

IS THERE A SILVER LININGYes and there are two parts which comprise this silver lining firstly historical trends suggest that the market has always breached its previous peak in the path of long-term recovery Secondly hedge funds have proven to be more resilient than broader financial markets

First let us look at some history of the recovery of financial markets The table below demonstrates the fact that all the major corrections in the market took many days to find a bottom and to recover For instance the global financial crisis took 369 days to reach trough from peak Similarly even though the current crisis is still evolving and may take some more time to find the bottom the long-term recovery prospects remain encouraging

Second the hedge fund industry in general holds up better than the overall market in times of crisis For instance the SampP 500 capitulated 37 in 2008 while the hedge fund industryrsquos performance was down 12 The performance of the industry then improved 14 in 2009 versus a ~265 gain for the SampP 500 Over this two-year period hedge funds outperformed the broader market In Q1 2020 the hedge fund industryrsquos performance was down ~7 (Source HFR) compared to a decline of ~20 for SampP 500 its worst first quarter on record Overall 818 of hedge-funds outperformed the global equity market in the month of March 2020 according to Eurekahedge

SampP 500 has never failed to regain a prior high

Source JPM Private Bank SampP FactSet

Event Prior peak Peak level Trough date Trough level DrawdownPeak to

trough (days)Trough to recovery

(days)

Fed tightening 2131980 11844 3271980 9822 -171 31 77

Fed tightening 11281980 14052 8121982 10242 -271 444 59

Fed tightening 10101983 17265 7241984 14782 -144 206 129

Black Monday 8251987 33677 1241987 22392 -335 73 428

Savings and loan crisis

7161990 36895 10111990 29546 -199 63 89

Asian financial crisis

1071997 98312 10271997 87699 -108 14 29

LTCM collapse 7171998 118675 8311998 95728 -193 31 60

Inflation and Fed tightening

7161999 141878 10151999 124741 -121 65 22

Tech bubble 3242000 152746 1092002 77676 -491 663 1210

Global financial crisis

1092007 156515 392009 67653 -568 369 1058

China currency devaluation

5212015 213082 2112016 182908 -142 190 107

Low volatility unwind

1262018 287287 282018 2581 -102 9 141

Fed tightening + trade war

9202018 293075 12242018 23511 -198 67 86

Coronavirus outbreak

2192020 338615 2272020 297876 -120 6

Average -234 171 269

wwwsganalyticscom

9

SGA Whitepaper | May 2020

9

Hedge fund industryrsquos resilience against broader markets

Source HFR FT

Performance ()

Credit hedge funds

Emerging markets

Relative value arbitrage

Global macro

Merger arbitrage

Market-neutral funds

Equity hedge funds

March Year-to-date

Hedge fund industry

-20 -15 -10 -5 0

wwwsganalyticscom

10

SGA Whitepaper | May 2020

FORTUNE FAVOURS THE ldquoPRUDENTLYrdquo BRAVE

Active managers Wealth creation

Testing timesBusiness model

Opportunities

wwwsganalyticscom SGA Whitepaper | May 2020wwwsganalyticscom SGA Whitepaper | May 2020

There is no evidence yet of panic selling from private clients as they are prepared to ride out the storm unlike what we witnessed during the sub-prime crisis This is arguably once-in-a-cycle opportunity for active managers as they review their allocation strategy question the quality and resilience of business models managementrsquos pedigree and balance sheet strengths of the companies under coverage - and of course scrutinise valuations after considering all the aforementioned parameters Even in this environment there will be earnings growth from companies which find themselves on the right side of the scale eg healthcare firms technology companies to name a few Conversely there are also opportunities to take short positions on companies either severely affected by weak demand or the ones expected to languish in a recessionary environment

The COVID-19 situation is still evolving and in testing times wealth creation as well as protection becomes challenging In such times it can be well argued that the cost-light model and liquidity of passive investing will continue to remain attractive That said it is equally true that volatility brings opportunity and while volatility will attack portfolios thoughtful diversification and prudent asset allocation can overturn such assaults Thatrsquos what active asset management delivers best ndash and hence should become increasingly important in the coming quarters In the words of the famous author J K Rowling

ldquoIt is our choices that show what we truly are far more than our abilitiesrdquo

wwwsganalyticscom

11

SGA Whitepaper | May 202011

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

About the Authors

Rajib DasSenior Manager ndash ResearchRajib has 12 years of experience as an Investment Research professional He has extensively worked with both the buy- and sell-side equity research companies He is an MBA (Finance and Systems) with immense research expertise across sectors and regions

Mayuresh WaghVP ndash ResearchMayuresh has over 12 years of experience in catering to research needs of buy-side and sell-side clients across the globe Starting his career as an equity analyst Mayuresh covered various sectors such as banking telecom and industrials before moving into a leadership role He has rich experience in setting up research engagements designing optimum workflow and process and actively managing client accounts to achieve delivery excellence

He is a Bachelor of Computer Sciences and completed his post-graduation (MBA) in Finance In his free time Mayuresh enjoys playing cricket listening to classical music and reading

wwwsganalyticscom

2

SGA Whitepaper | May 2020

Impact of COVID-19 on hedge funds

Will the recovery persist

Volatility friend andor foe

Is there a silver lining

Fortune favours the ldquoprudentlyrdquo brave

Hedge funds ndash survival of the fittest

1

2

6

3

4

5

3

4

10

6

7

8

CONTENTS

wwwsganalyticscom

3

SGA Whitepaper | May 2020

IMPACT OF COVID-19 ON HEDGE FUNDSThe last two months have been tumultuous for investors as clouds of volatility loomed over otherwise shining markets With the coronavirus (COVID-19) pandemic breaking all geographical barriers and smearing the world with its impact global institutions that were once concerned only about how emerging markets will battle this pandemic saw an unprecedented number of infections and deaths in some of the most influential and developed western world countries The crisis in a way has become a great leveller with markets across the world braving the same battle

All major equity indices worldwide had begun to melt since mid-February as COVID-19 started to spread across countries in Europe followed by the US Global markets plunged quickly by mid-March with FTSE Nikkei and SampP 500 losing close to 30 of their values during the period However in the past one month markets have rebounded to a great extent Surprisingly the SSE Composite Index remains one of the most resilient of the lot and has witnessed the least volatility year to date (YTD) China the global manufacturing engine already started its economic activities as Wuhan declared itself free from COVID-19

That said the reasons of the rebound need to be examined In developed countries the market recovery seems to be driven by strong financial support from central banks and governments rather than any amelioration in the pandemic situation The Fed cut lending rates by 150bps in just two tranches in March The US government has followed suit and announced a stimulus package of USD 2tn on 25 March to mitigate the economic impact of COVID-19 In Europe the UK government has announced a GBP 330bn package on 17 March and the next day European Central Bank (ECB) announced EUR 750bn coronavirus stimulus Clearly unlike the 2007-08 global financial crisis (GFC) capital markets are now flush with liquidity

3

Source Yahoo Finance SG Analytics

Global indices off their lows ndash as fiscal and monetary interventions kick-in

120

110

100

90

80

70

602-Jan 21-Jan 9-Feb

Shanghai composite

3 Mar 50bps rate cut by FED

15 Mar 100bps rate cut by FED

1 Apr US crossed 200000cases

8 Apr Japanrsquos USD 22bn package toshift production out of China

25 Mar USD 2tn stimulusannounced by US government

18 Mar EUR 750bn stimulusannounced by ECB

17 Mar GBP 330bn packageannounced by UK Government

24 Jan China surpassed 1000COVID cases

3 Feb Chinese trading restartsafter 12 days break 27 Feb China crossed

78000 cases

Nikkei FTSE SampP500 NASDAQ

28-Feb 18-Mar 6-Apr 25-Apr

Global indices

wwwsganalyticscom

4

SGA Whitepaper | May 2020

WILL THE RECOVERY PERSISTThat brings us to the next question if valuations have corrected are corporate earnings reflecting this Apparently not The SampP 500 Index has corrected ~20 from the latest peak of 3386 achieved on 19 Feb but 1-year rolling forward EPS estimate for the index has been revised down by only 10 Comparing this to the actual EPS of USD 163 for 2019 the 1-year rolling forward EPS estimate is down just 55 The SampP 500 composite index is currently trading at its highest PE ratio since the GFC

SampP valuation remains high

Given the continuing uncertainty related to the pandemic which is further exacerbated by the oil glut one could well argue that there are further headwinds on the way to sustainable recovery Latest macroeconomic projections and data releases such as the IMFrsquos GDP forecast US jobless claims etc all point towards a testing time for the markets at least in the short term According to the Wilshire 5000 Total Market Index the total market capitalization to GDP (sometimes referred to as the Buffet Indicator) is still substantially higher than the peak of last cycle Prior to the GFC at the end of first half of 2007 the indicator was at ~110 when the index was at its highest since the dot-com bubble By the end of Q1 2009 the market plummeted and the indicator almost halved to ~56 Since then the indicator has been rising steadfastly with minor corrections en route Value investors would hence question the optimism behind the recent significant rebound in financial markets

3500

3000

2500

2000

1500

1000

500

Apr-07 Apr-08 Apr-09

SampP 500 COMPOSITE-PRICE INDEX SampP 500 COMPOSITE-12M FWD PE Average PE

Average - 149x

188x

130x

89x

190x

170x

150x

130x

110x

90x

70x

50x

192x

Apr-10 Apr-11 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20Apr-12 Apr-13

SampP 500 Index vs 12M FWD PE

wwwsganalyticscom

5

SGA Whitepaper | May 2020

Source CCN FRED Global Macro Monitor

1600

1400

1200

1000

800

600

400

200

00

1989

1990

1991

Recession

Q1 2000

Q1 2009

14292

11076

7072

5636

Mar 23 202010532

Q2 2007

Q2 2002

Wilshire 5000GDP Feb 19 2020 ATH15824 (e)

Value Zone (LHS)

April 17 202013776 (e)

1992

1993

1996

1997

1998

1999

200

0

200

1

200

2

1994

1995

2003

200

4

200

5

200

6

2017

2018

2019

2020

200

7

2010

2011

2012

2013

2014

2015

2016

200

8

200

9

Stock market capitalization to GDP - Wilshire 5000 Total Market Index

wwwsganalyticscom

6

SGA Whitepaper | May 2020

As far as the capital markets are concerned periods of uncertainty generally foster volatility and while unnerving for some it could also provide both short term and long-term opportunities Yes their active management skills would be tested - but this situation provides a great stage for active managers to prove their mettle

Actively managed hedge funds by the very premise of their name are expected to provide return in excess of their respective benchmarks and protect capital of the investors in times of turmoil For instance macro hedge funds focused on currencies interest rates and commodities have withstood in this market capitulation Socieacuteteacute Geacuteneacuteralersquos CTA indices are in positive territory in April after a flat March emphasising the CTAsrsquo ability to generate lsquocrisis alpharsquo According to Forbes Alan Howardrsquos all-important Brevan Howard hedge fund significantly outperformed the market and returned 23 in Q1 2020 Similarly Andrew Lawrsquos Caxton Global Investment macro hedge fund returned 72 YTD as of 27 March according to an HSBC survey of hedge funds On the other hand Robert Gibbinsrsquo Autonomy Capital Ray Daliorsquos Bridgewater Associates the worldrsquos largest hedge fund fell 20 and 16 respectively in March 2020

Looking ahead quality launches are expected to continue According to NY Times eight or more European hedge funds are introducing portfolios based on the underlying theme of revival of corporate debt and emerging markets in the post COVID-19 world According to reports from Thomson Reuters industry interaction suggests that seven hedge funds with mandates in credit and equities are in various stages of new portfolio launches since the beginning of March 2020 According to HFM industry observers believe 2020 should see the number of new hedge fund launches at least match those in recent years (15 in H1 2018 and 21 in H1 2019)

VOLATILITY FRIEND ANDOR FOE

9000 600

500

400

300

200

100

8000

7000

6000

4000

5000

2000

3000

1000

1-Aug-19 1-Sep-19 1-Oct-19 1-Nov-19 1-Dec-19 1-Jan-19 1-Feb-19 1-Mar-19 1-Apr-19

SampP 500 Volume (mn)CBOE VIX (LHS)

CB

OE

VIX

Volu

me

(mill

ion

)

SampP 500 Volume vs CBOE VIX

- -

wwwsganalyticscom

7

SGA Whitepaper | May 2020

HEDGE FUNDS ndash SURVIVAL OF THE FITTESTThat said while continued high-quality launches are encouraging the overall number of hedge funds has been declining and there is a growing fear that smaller hedge funds (with less than a billion dollars in assets under management or AuM) might be at risk of survival In addition it is not so easy to grow AuM hedge funds have witnessed net outflows in 13 of the past 17 consecutive quarters according to data from Financial Times Healthy financial markets kept the overall AuM at around USD 3tn despite number of funds shrinking for the past few years However end clients continue to question the ldquo2 and 20rdquo fee structure as returns have failed to impress Consequently the hedge fund industry has conceded some of the AuM to private equity industry in 2019 AuM of the hedge fund industry lagged private equity peers by ~20

In Q1 2020 the AuM of the hedge fund industry have gone below USD 3tn for the first time since 2014 reflecting redemptions and performance declines according to eVestment hedge fund asset flows report The report puts the industry AUM at USD 2949bn In March 2020 heavy outflows of USD 2413bn more than offset the positive flows in Jan and Feb causing net outflow of USD 795bn YTD

Source Hedge Fund Research (HFR) FT The Economist Preqin

10

6

8

2

4

0

2000 2005 2010 2015 2019

Number of hedge funds globally (000)

Funds have fallen for five consecutive years

4

2

3

1

0

2009 11 13 15 17 19

Hedge funds

Private equity

Asset under management $trn

wwwsganalyticscom

8

SGA Whitepaper | May 2020

IS THERE A SILVER LININGYes and there are two parts which comprise this silver lining firstly historical trends suggest that the market has always breached its previous peak in the path of long-term recovery Secondly hedge funds have proven to be more resilient than broader financial markets

First let us look at some history of the recovery of financial markets The table below demonstrates the fact that all the major corrections in the market took many days to find a bottom and to recover For instance the global financial crisis took 369 days to reach trough from peak Similarly even though the current crisis is still evolving and may take some more time to find the bottom the long-term recovery prospects remain encouraging

Second the hedge fund industry in general holds up better than the overall market in times of crisis For instance the SampP 500 capitulated 37 in 2008 while the hedge fund industryrsquos performance was down 12 The performance of the industry then improved 14 in 2009 versus a ~265 gain for the SampP 500 Over this two-year period hedge funds outperformed the broader market In Q1 2020 the hedge fund industryrsquos performance was down ~7 (Source HFR) compared to a decline of ~20 for SampP 500 its worst first quarter on record Overall 818 of hedge-funds outperformed the global equity market in the month of March 2020 according to Eurekahedge

SampP 500 has never failed to regain a prior high

Source JPM Private Bank SampP FactSet

Event Prior peak Peak level Trough date Trough level DrawdownPeak to

trough (days)Trough to recovery

(days)

Fed tightening 2131980 11844 3271980 9822 -171 31 77

Fed tightening 11281980 14052 8121982 10242 -271 444 59

Fed tightening 10101983 17265 7241984 14782 -144 206 129

Black Monday 8251987 33677 1241987 22392 -335 73 428

Savings and loan crisis

7161990 36895 10111990 29546 -199 63 89

Asian financial crisis

1071997 98312 10271997 87699 -108 14 29

LTCM collapse 7171998 118675 8311998 95728 -193 31 60

Inflation and Fed tightening

7161999 141878 10151999 124741 -121 65 22

Tech bubble 3242000 152746 1092002 77676 -491 663 1210

Global financial crisis

1092007 156515 392009 67653 -568 369 1058

China currency devaluation

5212015 213082 2112016 182908 -142 190 107

Low volatility unwind

1262018 287287 282018 2581 -102 9 141

Fed tightening + trade war

9202018 293075 12242018 23511 -198 67 86

Coronavirus outbreak

2192020 338615 2272020 297876 -120 6

Average -234 171 269

wwwsganalyticscom

9

SGA Whitepaper | May 2020

9

Hedge fund industryrsquos resilience against broader markets

Source HFR FT

Performance ()

Credit hedge funds

Emerging markets

Relative value arbitrage

Global macro

Merger arbitrage

Market-neutral funds

Equity hedge funds

March Year-to-date

Hedge fund industry

-20 -15 -10 -5 0

wwwsganalyticscom

10

SGA Whitepaper | May 2020

FORTUNE FAVOURS THE ldquoPRUDENTLYrdquo BRAVE

Active managers Wealth creation

Testing timesBusiness model

Opportunities

wwwsganalyticscom SGA Whitepaper | May 2020wwwsganalyticscom SGA Whitepaper | May 2020

There is no evidence yet of panic selling from private clients as they are prepared to ride out the storm unlike what we witnessed during the sub-prime crisis This is arguably once-in-a-cycle opportunity for active managers as they review their allocation strategy question the quality and resilience of business models managementrsquos pedigree and balance sheet strengths of the companies under coverage - and of course scrutinise valuations after considering all the aforementioned parameters Even in this environment there will be earnings growth from companies which find themselves on the right side of the scale eg healthcare firms technology companies to name a few Conversely there are also opportunities to take short positions on companies either severely affected by weak demand or the ones expected to languish in a recessionary environment

The COVID-19 situation is still evolving and in testing times wealth creation as well as protection becomes challenging In such times it can be well argued that the cost-light model and liquidity of passive investing will continue to remain attractive That said it is equally true that volatility brings opportunity and while volatility will attack portfolios thoughtful diversification and prudent asset allocation can overturn such assaults Thatrsquos what active asset management delivers best ndash and hence should become increasingly important in the coming quarters In the words of the famous author J K Rowling

ldquoIt is our choices that show what we truly are far more than our abilitiesrdquo

wwwsganalyticscom

11

SGA Whitepaper | May 202011

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

About the Authors

Rajib DasSenior Manager ndash ResearchRajib has 12 years of experience as an Investment Research professional He has extensively worked with both the buy- and sell-side equity research companies He is an MBA (Finance and Systems) with immense research expertise across sectors and regions

Mayuresh WaghVP ndash ResearchMayuresh has over 12 years of experience in catering to research needs of buy-side and sell-side clients across the globe Starting his career as an equity analyst Mayuresh covered various sectors such as banking telecom and industrials before moving into a leadership role He has rich experience in setting up research engagements designing optimum workflow and process and actively managing client accounts to achieve delivery excellence

He is a Bachelor of Computer Sciences and completed his post-graduation (MBA) in Finance In his free time Mayuresh enjoys playing cricket listening to classical music and reading

wwwsganalyticscom

3

SGA Whitepaper | May 2020

IMPACT OF COVID-19 ON HEDGE FUNDSThe last two months have been tumultuous for investors as clouds of volatility loomed over otherwise shining markets With the coronavirus (COVID-19) pandemic breaking all geographical barriers and smearing the world with its impact global institutions that were once concerned only about how emerging markets will battle this pandemic saw an unprecedented number of infections and deaths in some of the most influential and developed western world countries The crisis in a way has become a great leveller with markets across the world braving the same battle

All major equity indices worldwide had begun to melt since mid-February as COVID-19 started to spread across countries in Europe followed by the US Global markets plunged quickly by mid-March with FTSE Nikkei and SampP 500 losing close to 30 of their values during the period However in the past one month markets have rebounded to a great extent Surprisingly the SSE Composite Index remains one of the most resilient of the lot and has witnessed the least volatility year to date (YTD) China the global manufacturing engine already started its economic activities as Wuhan declared itself free from COVID-19

That said the reasons of the rebound need to be examined In developed countries the market recovery seems to be driven by strong financial support from central banks and governments rather than any amelioration in the pandemic situation The Fed cut lending rates by 150bps in just two tranches in March The US government has followed suit and announced a stimulus package of USD 2tn on 25 March to mitigate the economic impact of COVID-19 In Europe the UK government has announced a GBP 330bn package on 17 March and the next day European Central Bank (ECB) announced EUR 750bn coronavirus stimulus Clearly unlike the 2007-08 global financial crisis (GFC) capital markets are now flush with liquidity

3

Source Yahoo Finance SG Analytics

Global indices off their lows ndash as fiscal and monetary interventions kick-in

120

110

100

90

80

70

602-Jan 21-Jan 9-Feb

Shanghai composite

3 Mar 50bps rate cut by FED

15 Mar 100bps rate cut by FED

1 Apr US crossed 200000cases

8 Apr Japanrsquos USD 22bn package toshift production out of China

25 Mar USD 2tn stimulusannounced by US government

18 Mar EUR 750bn stimulusannounced by ECB

17 Mar GBP 330bn packageannounced by UK Government

24 Jan China surpassed 1000COVID cases

3 Feb Chinese trading restartsafter 12 days break 27 Feb China crossed

78000 cases

Nikkei FTSE SampP500 NASDAQ

28-Feb 18-Mar 6-Apr 25-Apr

Global indices

wwwsganalyticscom

4

SGA Whitepaper | May 2020

WILL THE RECOVERY PERSISTThat brings us to the next question if valuations have corrected are corporate earnings reflecting this Apparently not The SampP 500 Index has corrected ~20 from the latest peak of 3386 achieved on 19 Feb but 1-year rolling forward EPS estimate for the index has been revised down by only 10 Comparing this to the actual EPS of USD 163 for 2019 the 1-year rolling forward EPS estimate is down just 55 The SampP 500 composite index is currently trading at its highest PE ratio since the GFC

SampP valuation remains high

Given the continuing uncertainty related to the pandemic which is further exacerbated by the oil glut one could well argue that there are further headwinds on the way to sustainable recovery Latest macroeconomic projections and data releases such as the IMFrsquos GDP forecast US jobless claims etc all point towards a testing time for the markets at least in the short term According to the Wilshire 5000 Total Market Index the total market capitalization to GDP (sometimes referred to as the Buffet Indicator) is still substantially higher than the peak of last cycle Prior to the GFC at the end of first half of 2007 the indicator was at ~110 when the index was at its highest since the dot-com bubble By the end of Q1 2009 the market plummeted and the indicator almost halved to ~56 Since then the indicator has been rising steadfastly with minor corrections en route Value investors would hence question the optimism behind the recent significant rebound in financial markets

3500

3000

2500

2000

1500

1000

500

Apr-07 Apr-08 Apr-09

SampP 500 COMPOSITE-PRICE INDEX SampP 500 COMPOSITE-12M FWD PE Average PE

Average - 149x

188x

130x

89x

190x

170x

150x

130x

110x

90x

70x

50x

192x

Apr-10 Apr-11 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20Apr-12 Apr-13

SampP 500 Index vs 12M FWD PE

wwwsganalyticscom

5

SGA Whitepaper | May 2020

Source CCN FRED Global Macro Monitor

1600

1400

1200

1000

800

600

400

200

00

1989

1990

1991

Recession

Q1 2000

Q1 2009

14292

11076

7072

5636

Mar 23 202010532

Q2 2007

Q2 2002

Wilshire 5000GDP Feb 19 2020 ATH15824 (e)

Value Zone (LHS)

April 17 202013776 (e)

1992

1993

1996

1997

1998

1999

200

0

200

1

200

2

1994

1995

2003

200

4

200

5

200

6

2017

2018

2019

2020

200

7

2010

2011

2012

2013

2014

2015

2016

200

8

200

9

Stock market capitalization to GDP - Wilshire 5000 Total Market Index

wwwsganalyticscom

6

SGA Whitepaper | May 2020

As far as the capital markets are concerned periods of uncertainty generally foster volatility and while unnerving for some it could also provide both short term and long-term opportunities Yes their active management skills would be tested - but this situation provides a great stage for active managers to prove their mettle

Actively managed hedge funds by the very premise of their name are expected to provide return in excess of their respective benchmarks and protect capital of the investors in times of turmoil For instance macro hedge funds focused on currencies interest rates and commodities have withstood in this market capitulation Socieacuteteacute Geacuteneacuteralersquos CTA indices are in positive territory in April after a flat March emphasising the CTAsrsquo ability to generate lsquocrisis alpharsquo According to Forbes Alan Howardrsquos all-important Brevan Howard hedge fund significantly outperformed the market and returned 23 in Q1 2020 Similarly Andrew Lawrsquos Caxton Global Investment macro hedge fund returned 72 YTD as of 27 March according to an HSBC survey of hedge funds On the other hand Robert Gibbinsrsquo Autonomy Capital Ray Daliorsquos Bridgewater Associates the worldrsquos largest hedge fund fell 20 and 16 respectively in March 2020

Looking ahead quality launches are expected to continue According to NY Times eight or more European hedge funds are introducing portfolios based on the underlying theme of revival of corporate debt and emerging markets in the post COVID-19 world According to reports from Thomson Reuters industry interaction suggests that seven hedge funds with mandates in credit and equities are in various stages of new portfolio launches since the beginning of March 2020 According to HFM industry observers believe 2020 should see the number of new hedge fund launches at least match those in recent years (15 in H1 2018 and 21 in H1 2019)

VOLATILITY FRIEND ANDOR FOE

9000 600

500

400

300

200

100

8000

7000

6000

4000

5000

2000

3000

1000

1-Aug-19 1-Sep-19 1-Oct-19 1-Nov-19 1-Dec-19 1-Jan-19 1-Feb-19 1-Mar-19 1-Apr-19

SampP 500 Volume (mn)CBOE VIX (LHS)

CB

OE

VIX

Volu

me

(mill

ion

)

SampP 500 Volume vs CBOE VIX

- -

wwwsganalyticscom

7

SGA Whitepaper | May 2020

HEDGE FUNDS ndash SURVIVAL OF THE FITTESTThat said while continued high-quality launches are encouraging the overall number of hedge funds has been declining and there is a growing fear that smaller hedge funds (with less than a billion dollars in assets under management or AuM) might be at risk of survival In addition it is not so easy to grow AuM hedge funds have witnessed net outflows in 13 of the past 17 consecutive quarters according to data from Financial Times Healthy financial markets kept the overall AuM at around USD 3tn despite number of funds shrinking for the past few years However end clients continue to question the ldquo2 and 20rdquo fee structure as returns have failed to impress Consequently the hedge fund industry has conceded some of the AuM to private equity industry in 2019 AuM of the hedge fund industry lagged private equity peers by ~20

In Q1 2020 the AuM of the hedge fund industry have gone below USD 3tn for the first time since 2014 reflecting redemptions and performance declines according to eVestment hedge fund asset flows report The report puts the industry AUM at USD 2949bn In March 2020 heavy outflows of USD 2413bn more than offset the positive flows in Jan and Feb causing net outflow of USD 795bn YTD

Source Hedge Fund Research (HFR) FT The Economist Preqin

10

6

8

2

4

0

2000 2005 2010 2015 2019

Number of hedge funds globally (000)

Funds have fallen for five consecutive years

4

2

3

1

0

2009 11 13 15 17 19

Hedge funds

Private equity

Asset under management $trn

wwwsganalyticscom

8

SGA Whitepaper | May 2020

IS THERE A SILVER LININGYes and there are two parts which comprise this silver lining firstly historical trends suggest that the market has always breached its previous peak in the path of long-term recovery Secondly hedge funds have proven to be more resilient than broader financial markets

First let us look at some history of the recovery of financial markets The table below demonstrates the fact that all the major corrections in the market took many days to find a bottom and to recover For instance the global financial crisis took 369 days to reach trough from peak Similarly even though the current crisis is still evolving and may take some more time to find the bottom the long-term recovery prospects remain encouraging

Second the hedge fund industry in general holds up better than the overall market in times of crisis For instance the SampP 500 capitulated 37 in 2008 while the hedge fund industryrsquos performance was down 12 The performance of the industry then improved 14 in 2009 versus a ~265 gain for the SampP 500 Over this two-year period hedge funds outperformed the broader market In Q1 2020 the hedge fund industryrsquos performance was down ~7 (Source HFR) compared to a decline of ~20 for SampP 500 its worst first quarter on record Overall 818 of hedge-funds outperformed the global equity market in the month of March 2020 according to Eurekahedge

SampP 500 has never failed to regain a prior high

Source JPM Private Bank SampP FactSet

Event Prior peak Peak level Trough date Trough level DrawdownPeak to

trough (days)Trough to recovery

(days)

Fed tightening 2131980 11844 3271980 9822 -171 31 77

Fed tightening 11281980 14052 8121982 10242 -271 444 59

Fed tightening 10101983 17265 7241984 14782 -144 206 129

Black Monday 8251987 33677 1241987 22392 -335 73 428

Savings and loan crisis

7161990 36895 10111990 29546 -199 63 89

Asian financial crisis

1071997 98312 10271997 87699 -108 14 29

LTCM collapse 7171998 118675 8311998 95728 -193 31 60

Inflation and Fed tightening

7161999 141878 10151999 124741 -121 65 22

Tech bubble 3242000 152746 1092002 77676 -491 663 1210

Global financial crisis

1092007 156515 392009 67653 -568 369 1058

China currency devaluation

5212015 213082 2112016 182908 -142 190 107

Low volatility unwind

1262018 287287 282018 2581 -102 9 141

Fed tightening + trade war

9202018 293075 12242018 23511 -198 67 86

Coronavirus outbreak

2192020 338615 2272020 297876 -120 6

Average -234 171 269

wwwsganalyticscom

9

SGA Whitepaper | May 2020

9

Hedge fund industryrsquos resilience against broader markets

Source HFR FT

Performance ()

Credit hedge funds

Emerging markets

Relative value arbitrage

Global macro

Merger arbitrage

Market-neutral funds

Equity hedge funds

March Year-to-date

Hedge fund industry

-20 -15 -10 -5 0

wwwsganalyticscom

10

SGA Whitepaper | May 2020

FORTUNE FAVOURS THE ldquoPRUDENTLYrdquo BRAVE

Active managers Wealth creation

Testing timesBusiness model

Opportunities

wwwsganalyticscom SGA Whitepaper | May 2020wwwsganalyticscom SGA Whitepaper | May 2020

There is no evidence yet of panic selling from private clients as they are prepared to ride out the storm unlike what we witnessed during the sub-prime crisis This is arguably once-in-a-cycle opportunity for active managers as they review their allocation strategy question the quality and resilience of business models managementrsquos pedigree and balance sheet strengths of the companies under coverage - and of course scrutinise valuations after considering all the aforementioned parameters Even in this environment there will be earnings growth from companies which find themselves on the right side of the scale eg healthcare firms technology companies to name a few Conversely there are also opportunities to take short positions on companies either severely affected by weak demand or the ones expected to languish in a recessionary environment

The COVID-19 situation is still evolving and in testing times wealth creation as well as protection becomes challenging In such times it can be well argued that the cost-light model and liquidity of passive investing will continue to remain attractive That said it is equally true that volatility brings opportunity and while volatility will attack portfolios thoughtful diversification and prudent asset allocation can overturn such assaults Thatrsquos what active asset management delivers best ndash and hence should become increasingly important in the coming quarters In the words of the famous author J K Rowling

ldquoIt is our choices that show what we truly are far more than our abilitiesrdquo

wwwsganalyticscom

11

SGA Whitepaper | May 202011

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

About the Authors

Rajib DasSenior Manager ndash ResearchRajib has 12 years of experience as an Investment Research professional He has extensively worked with both the buy- and sell-side equity research companies He is an MBA (Finance and Systems) with immense research expertise across sectors and regions

Mayuresh WaghVP ndash ResearchMayuresh has over 12 years of experience in catering to research needs of buy-side and sell-side clients across the globe Starting his career as an equity analyst Mayuresh covered various sectors such as banking telecom and industrials before moving into a leadership role He has rich experience in setting up research engagements designing optimum workflow and process and actively managing client accounts to achieve delivery excellence

He is a Bachelor of Computer Sciences and completed his post-graduation (MBA) in Finance In his free time Mayuresh enjoys playing cricket listening to classical music and reading

wwwsganalyticscom

4

SGA Whitepaper | May 2020

WILL THE RECOVERY PERSISTThat brings us to the next question if valuations have corrected are corporate earnings reflecting this Apparently not The SampP 500 Index has corrected ~20 from the latest peak of 3386 achieved on 19 Feb but 1-year rolling forward EPS estimate for the index has been revised down by only 10 Comparing this to the actual EPS of USD 163 for 2019 the 1-year rolling forward EPS estimate is down just 55 The SampP 500 composite index is currently trading at its highest PE ratio since the GFC

SampP valuation remains high

Given the continuing uncertainty related to the pandemic which is further exacerbated by the oil glut one could well argue that there are further headwinds on the way to sustainable recovery Latest macroeconomic projections and data releases such as the IMFrsquos GDP forecast US jobless claims etc all point towards a testing time for the markets at least in the short term According to the Wilshire 5000 Total Market Index the total market capitalization to GDP (sometimes referred to as the Buffet Indicator) is still substantially higher than the peak of last cycle Prior to the GFC at the end of first half of 2007 the indicator was at ~110 when the index was at its highest since the dot-com bubble By the end of Q1 2009 the market plummeted and the indicator almost halved to ~56 Since then the indicator has been rising steadfastly with minor corrections en route Value investors would hence question the optimism behind the recent significant rebound in financial markets

3500

3000

2500

2000

1500

1000

500

Apr-07 Apr-08 Apr-09

SampP 500 COMPOSITE-PRICE INDEX SampP 500 COMPOSITE-12M FWD PE Average PE

Average - 149x

188x

130x

89x

190x

170x

150x

130x

110x

90x

70x

50x

192x

Apr-10 Apr-11 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20Apr-12 Apr-13

SampP 500 Index vs 12M FWD PE

wwwsganalyticscom

5

SGA Whitepaper | May 2020

Source CCN FRED Global Macro Monitor

1600

1400

1200

1000

800

600

400

200

00

1989

1990

1991

Recession

Q1 2000

Q1 2009

14292

11076

7072

5636

Mar 23 202010532

Q2 2007

Q2 2002

Wilshire 5000GDP Feb 19 2020 ATH15824 (e)

Value Zone (LHS)

April 17 202013776 (e)

1992

1993

1996

1997

1998

1999

200

0

200

1

200

2

1994

1995

2003

200

4

200

5

200

6

2017

2018

2019

2020

200

7

2010

2011

2012

2013

2014

2015

2016

200

8

200

9

Stock market capitalization to GDP - Wilshire 5000 Total Market Index

wwwsganalyticscom

6

SGA Whitepaper | May 2020

As far as the capital markets are concerned periods of uncertainty generally foster volatility and while unnerving for some it could also provide both short term and long-term opportunities Yes their active management skills would be tested - but this situation provides a great stage for active managers to prove their mettle

Actively managed hedge funds by the very premise of their name are expected to provide return in excess of their respective benchmarks and protect capital of the investors in times of turmoil For instance macro hedge funds focused on currencies interest rates and commodities have withstood in this market capitulation Socieacuteteacute Geacuteneacuteralersquos CTA indices are in positive territory in April after a flat March emphasising the CTAsrsquo ability to generate lsquocrisis alpharsquo According to Forbes Alan Howardrsquos all-important Brevan Howard hedge fund significantly outperformed the market and returned 23 in Q1 2020 Similarly Andrew Lawrsquos Caxton Global Investment macro hedge fund returned 72 YTD as of 27 March according to an HSBC survey of hedge funds On the other hand Robert Gibbinsrsquo Autonomy Capital Ray Daliorsquos Bridgewater Associates the worldrsquos largest hedge fund fell 20 and 16 respectively in March 2020

Looking ahead quality launches are expected to continue According to NY Times eight or more European hedge funds are introducing portfolios based on the underlying theme of revival of corporate debt and emerging markets in the post COVID-19 world According to reports from Thomson Reuters industry interaction suggests that seven hedge funds with mandates in credit and equities are in various stages of new portfolio launches since the beginning of March 2020 According to HFM industry observers believe 2020 should see the number of new hedge fund launches at least match those in recent years (15 in H1 2018 and 21 in H1 2019)

VOLATILITY FRIEND ANDOR FOE

9000 600

500

400

300

200

100

8000

7000

6000

4000

5000

2000

3000

1000

1-Aug-19 1-Sep-19 1-Oct-19 1-Nov-19 1-Dec-19 1-Jan-19 1-Feb-19 1-Mar-19 1-Apr-19

SampP 500 Volume (mn)CBOE VIX (LHS)

CB

OE

VIX

Volu

me

(mill

ion

)

SampP 500 Volume vs CBOE VIX

- -

wwwsganalyticscom

7

SGA Whitepaper | May 2020

HEDGE FUNDS ndash SURVIVAL OF THE FITTESTThat said while continued high-quality launches are encouraging the overall number of hedge funds has been declining and there is a growing fear that smaller hedge funds (with less than a billion dollars in assets under management or AuM) might be at risk of survival In addition it is not so easy to grow AuM hedge funds have witnessed net outflows in 13 of the past 17 consecutive quarters according to data from Financial Times Healthy financial markets kept the overall AuM at around USD 3tn despite number of funds shrinking for the past few years However end clients continue to question the ldquo2 and 20rdquo fee structure as returns have failed to impress Consequently the hedge fund industry has conceded some of the AuM to private equity industry in 2019 AuM of the hedge fund industry lagged private equity peers by ~20

In Q1 2020 the AuM of the hedge fund industry have gone below USD 3tn for the first time since 2014 reflecting redemptions and performance declines according to eVestment hedge fund asset flows report The report puts the industry AUM at USD 2949bn In March 2020 heavy outflows of USD 2413bn more than offset the positive flows in Jan and Feb causing net outflow of USD 795bn YTD

Source Hedge Fund Research (HFR) FT The Economist Preqin

10

6

8

2

4

0

2000 2005 2010 2015 2019

Number of hedge funds globally (000)

Funds have fallen for five consecutive years

4

2

3

1

0

2009 11 13 15 17 19

Hedge funds

Private equity

Asset under management $trn

wwwsganalyticscom

8

SGA Whitepaper | May 2020

IS THERE A SILVER LININGYes and there are two parts which comprise this silver lining firstly historical trends suggest that the market has always breached its previous peak in the path of long-term recovery Secondly hedge funds have proven to be more resilient than broader financial markets

First let us look at some history of the recovery of financial markets The table below demonstrates the fact that all the major corrections in the market took many days to find a bottom and to recover For instance the global financial crisis took 369 days to reach trough from peak Similarly even though the current crisis is still evolving and may take some more time to find the bottom the long-term recovery prospects remain encouraging

Second the hedge fund industry in general holds up better than the overall market in times of crisis For instance the SampP 500 capitulated 37 in 2008 while the hedge fund industryrsquos performance was down 12 The performance of the industry then improved 14 in 2009 versus a ~265 gain for the SampP 500 Over this two-year period hedge funds outperformed the broader market In Q1 2020 the hedge fund industryrsquos performance was down ~7 (Source HFR) compared to a decline of ~20 for SampP 500 its worst first quarter on record Overall 818 of hedge-funds outperformed the global equity market in the month of March 2020 according to Eurekahedge

SampP 500 has never failed to regain a prior high

Source JPM Private Bank SampP FactSet

Event Prior peak Peak level Trough date Trough level DrawdownPeak to

trough (days)Trough to recovery

(days)

Fed tightening 2131980 11844 3271980 9822 -171 31 77

Fed tightening 11281980 14052 8121982 10242 -271 444 59

Fed tightening 10101983 17265 7241984 14782 -144 206 129

Black Monday 8251987 33677 1241987 22392 -335 73 428

Savings and loan crisis

7161990 36895 10111990 29546 -199 63 89

Asian financial crisis

1071997 98312 10271997 87699 -108 14 29

LTCM collapse 7171998 118675 8311998 95728 -193 31 60

Inflation and Fed tightening

7161999 141878 10151999 124741 -121 65 22

Tech bubble 3242000 152746 1092002 77676 -491 663 1210

Global financial crisis

1092007 156515 392009 67653 -568 369 1058

China currency devaluation

5212015 213082 2112016 182908 -142 190 107

Low volatility unwind

1262018 287287 282018 2581 -102 9 141

Fed tightening + trade war

9202018 293075 12242018 23511 -198 67 86

Coronavirus outbreak

2192020 338615 2272020 297876 -120 6

Average -234 171 269

wwwsganalyticscom

9

SGA Whitepaper | May 2020

9

Hedge fund industryrsquos resilience against broader markets

Source HFR FT

Performance ()

Credit hedge funds

Emerging markets

Relative value arbitrage

Global macro

Merger arbitrage

Market-neutral funds

Equity hedge funds

March Year-to-date

Hedge fund industry

-20 -15 -10 -5 0

wwwsganalyticscom

10

SGA Whitepaper | May 2020

FORTUNE FAVOURS THE ldquoPRUDENTLYrdquo BRAVE

Active managers Wealth creation

Testing timesBusiness model

Opportunities

wwwsganalyticscom SGA Whitepaper | May 2020wwwsganalyticscom SGA Whitepaper | May 2020

There is no evidence yet of panic selling from private clients as they are prepared to ride out the storm unlike what we witnessed during the sub-prime crisis This is arguably once-in-a-cycle opportunity for active managers as they review their allocation strategy question the quality and resilience of business models managementrsquos pedigree and balance sheet strengths of the companies under coverage - and of course scrutinise valuations after considering all the aforementioned parameters Even in this environment there will be earnings growth from companies which find themselves on the right side of the scale eg healthcare firms technology companies to name a few Conversely there are also opportunities to take short positions on companies either severely affected by weak demand or the ones expected to languish in a recessionary environment

The COVID-19 situation is still evolving and in testing times wealth creation as well as protection becomes challenging In such times it can be well argued that the cost-light model and liquidity of passive investing will continue to remain attractive That said it is equally true that volatility brings opportunity and while volatility will attack portfolios thoughtful diversification and prudent asset allocation can overturn such assaults Thatrsquos what active asset management delivers best ndash and hence should become increasingly important in the coming quarters In the words of the famous author J K Rowling

ldquoIt is our choices that show what we truly are far more than our abilitiesrdquo

wwwsganalyticscom

11

SGA Whitepaper | May 202011

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

About the Authors

Rajib DasSenior Manager ndash ResearchRajib has 12 years of experience as an Investment Research professional He has extensively worked with both the buy- and sell-side equity research companies He is an MBA (Finance and Systems) with immense research expertise across sectors and regions

Mayuresh WaghVP ndash ResearchMayuresh has over 12 years of experience in catering to research needs of buy-side and sell-side clients across the globe Starting his career as an equity analyst Mayuresh covered various sectors such as banking telecom and industrials before moving into a leadership role He has rich experience in setting up research engagements designing optimum workflow and process and actively managing client accounts to achieve delivery excellence

He is a Bachelor of Computer Sciences and completed his post-graduation (MBA) in Finance In his free time Mayuresh enjoys playing cricket listening to classical music and reading

wwwsganalyticscom

5

SGA Whitepaper | May 2020

Source CCN FRED Global Macro Monitor

1600

1400

1200

1000

800

600

400

200

00

1989

1990

1991

Recession

Q1 2000

Q1 2009

14292

11076

7072

5636

Mar 23 202010532

Q2 2007

Q2 2002

Wilshire 5000GDP Feb 19 2020 ATH15824 (e)

Value Zone (LHS)

April 17 202013776 (e)

1992

1993

1996

1997

1998

1999

200

0

200

1

200

2

1994

1995

2003

200

4

200

5

200

6

2017

2018

2019

2020

200

7

2010

2011

2012

2013

2014

2015

2016

200

8

200

9

Stock market capitalization to GDP - Wilshire 5000 Total Market Index

wwwsganalyticscom

6

SGA Whitepaper | May 2020

As far as the capital markets are concerned periods of uncertainty generally foster volatility and while unnerving for some it could also provide both short term and long-term opportunities Yes their active management skills would be tested - but this situation provides a great stage for active managers to prove their mettle

Actively managed hedge funds by the very premise of their name are expected to provide return in excess of their respective benchmarks and protect capital of the investors in times of turmoil For instance macro hedge funds focused on currencies interest rates and commodities have withstood in this market capitulation Socieacuteteacute Geacuteneacuteralersquos CTA indices are in positive territory in April after a flat March emphasising the CTAsrsquo ability to generate lsquocrisis alpharsquo According to Forbes Alan Howardrsquos all-important Brevan Howard hedge fund significantly outperformed the market and returned 23 in Q1 2020 Similarly Andrew Lawrsquos Caxton Global Investment macro hedge fund returned 72 YTD as of 27 March according to an HSBC survey of hedge funds On the other hand Robert Gibbinsrsquo Autonomy Capital Ray Daliorsquos Bridgewater Associates the worldrsquos largest hedge fund fell 20 and 16 respectively in March 2020

Looking ahead quality launches are expected to continue According to NY Times eight or more European hedge funds are introducing portfolios based on the underlying theme of revival of corporate debt and emerging markets in the post COVID-19 world According to reports from Thomson Reuters industry interaction suggests that seven hedge funds with mandates in credit and equities are in various stages of new portfolio launches since the beginning of March 2020 According to HFM industry observers believe 2020 should see the number of new hedge fund launches at least match those in recent years (15 in H1 2018 and 21 in H1 2019)

VOLATILITY FRIEND ANDOR FOE

9000 600

500

400

300

200

100

8000

7000

6000

4000

5000

2000

3000

1000

1-Aug-19 1-Sep-19 1-Oct-19 1-Nov-19 1-Dec-19 1-Jan-19 1-Feb-19 1-Mar-19 1-Apr-19

SampP 500 Volume (mn)CBOE VIX (LHS)

CB

OE

VIX

Volu

me

(mill

ion

)

SampP 500 Volume vs CBOE VIX

- -

wwwsganalyticscom

7

SGA Whitepaper | May 2020

HEDGE FUNDS ndash SURVIVAL OF THE FITTESTThat said while continued high-quality launches are encouraging the overall number of hedge funds has been declining and there is a growing fear that smaller hedge funds (with less than a billion dollars in assets under management or AuM) might be at risk of survival In addition it is not so easy to grow AuM hedge funds have witnessed net outflows in 13 of the past 17 consecutive quarters according to data from Financial Times Healthy financial markets kept the overall AuM at around USD 3tn despite number of funds shrinking for the past few years However end clients continue to question the ldquo2 and 20rdquo fee structure as returns have failed to impress Consequently the hedge fund industry has conceded some of the AuM to private equity industry in 2019 AuM of the hedge fund industry lagged private equity peers by ~20

In Q1 2020 the AuM of the hedge fund industry have gone below USD 3tn for the first time since 2014 reflecting redemptions and performance declines according to eVestment hedge fund asset flows report The report puts the industry AUM at USD 2949bn In March 2020 heavy outflows of USD 2413bn more than offset the positive flows in Jan and Feb causing net outflow of USD 795bn YTD

Source Hedge Fund Research (HFR) FT The Economist Preqin

10

6

8

2

4

0

2000 2005 2010 2015 2019

Number of hedge funds globally (000)

Funds have fallen for five consecutive years

4

2

3

1

0

2009 11 13 15 17 19

Hedge funds

Private equity

Asset under management $trn

wwwsganalyticscom

8

SGA Whitepaper | May 2020

IS THERE A SILVER LININGYes and there are two parts which comprise this silver lining firstly historical trends suggest that the market has always breached its previous peak in the path of long-term recovery Secondly hedge funds have proven to be more resilient than broader financial markets

First let us look at some history of the recovery of financial markets The table below demonstrates the fact that all the major corrections in the market took many days to find a bottom and to recover For instance the global financial crisis took 369 days to reach trough from peak Similarly even though the current crisis is still evolving and may take some more time to find the bottom the long-term recovery prospects remain encouraging

Second the hedge fund industry in general holds up better than the overall market in times of crisis For instance the SampP 500 capitulated 37 in 2008 while the hedge fund industryrsquos performance was down 12 The performance of the industry then improved 14 in 2009 versus a ~265 gain for the SampP 500 Over this two-year period hedge funds outperformed the broader market In Q1 2020 the hedge fund industryrsquos performance was down ~7 (Source HFR) compared to a decline of ~20 for SampP 500 its worst first quarter on record Overall 818 of hedge-funds outperformed the global equity market in the month of March 2020 according to Eurekahedge

SampP 500 has never failed to regain a prior high

Source JPM Private Bank SampP FactSet

Event Prior peak Peak level Trough date Trough level DrawdownPeak to

trough (days)Trough to recovery

(days)

Fed tightening 2131980 11844 3271980 9822 -171 31 77

Fed tightening 11281980 14052 8121982 10242 -271 444 59

Fed tightening 10101983 17265 7241984 14782 -144 206 129

Black Monday 8251987 33677 1241987 22392 -335 73 428

Savings and loan crisis

7161990 36895 10111990 29546 -199 63 89

Asian financial crisis

1071997 98312 10271997 87699 -108 14 29

LTCM collapse 7171998 118675 8311998 95728 -193 31 60

Inflation and Fed tightening

7161999 141878 10151999 124741 -121 65 22

Tech bubble 3242000 152746 1092002 77676 -491 663 1210

Global financial crisis

1092007 156515 392009 67653 -568 369 1058

China currency devaluation

5212015 213082 2112016 182908 -142 190 107

Low volatility unwind

1262018 287287 282018 2581 -102 9 141

Fed tightening + trade war

9202018 293075 12242018 23511 -198 67 86

Coronavirus outbreak

2192020 338615 2272020 297876 -120 6

Average -234 171 269

wwwsganalyticscom

9

SGA Whitepaper | May 2020

9

Hedge fund industryrsquos resilience against broader markets

Source HFR FT

Performance ()

Credit hedge funds

Emerging markets

Relative value arbitrage

Global macro

Merger arbitrage

Market-neutral funds

Equity hedge funds

March Year-to-date

Hedge fund industry

-20 -15 -10 -5 0

wwwsganalyticscom

10

SGA Whitepaper | May 2020

FORTUNE FAVOURS THE ldquoPRUDENTLYrdquo BRAVE

Active managers Wealth creation

Testing timesBusiness model

Opportunities

wwwsganalyticscom SGA Whitepaper | May 2020wwwsganalyticscom SGA Whitepaper | May 2020

There is no evidence yet of panic selling from private clients as they are prepared to ride out the storm unlike what we witnessed during the sub-prime crisis This is arguably once-in-a-cycle opportunity for active managers as they review their allocation strategy question the quality and resilience of business models managementrsquos pedigree and balance sheet strengths of the companies under coverage - and of course scrutinise valuations after considering all the aforementioned parameters Even in this environment there will be earnings growth from companies which find themselves on the right side of the scale eg healthcare firms technology companies to name a few Conversely there are also opportunities to take short positions on companies either severely affected by weak demand or the ones expected to languish in a recessionary environment

The COVID-19 situation is still evolving and in testing times wealth creation as well as protection becomes challenging In such times it can be well argued that the cost-light model and liquidity of passive investing will continue to remain attractive That said it is equally true that volatility brings opportunity and while volatility will attack portfolios thoughtful diversification and prudent asset allocation can overturn such assaults Thatrsquos what active asset management delivers best ndash and hence should become increasingly important in the coming quarters In the words of the famous author J K Rowling

ldquoIt is our choices that show what we truly are far more than our abilitiesrdquo

wwwsganalyticscom

11

SGA Whitepaper | May 202011

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

About the Authors

Rajib DasSenior Manager ndash ResearchRajib has 12 years of experience as an Investment Research professional He has extensively worked with both the buy- and sell-side equity research companies He is an MBA (Finance and Systems) with immense research expertise across sectors and regions

Mayuresh WaghVP ndash ResearchMayuresh has over 12 years of experience in catering to research needs of buy-side and sell-side clients across the globe Starting his career as an equity analyst Mayuresh covered various sectors such as banking telecom and industrials before moving into a leadership role He has rich experience in setting up research engagements designing optimum workflow and process and actively managing client accounts to achieve delivery excellence

He is a Bachelor of Computer Sciences and completed his post-graduation (MBA) in Finance In his free time Mayuresh enjoys playing cricket listening to classical music and reading

wwwsganalyticscom

6

SGA Whitepaper | May 2020

As far as the capital markets are concerned periods of uncertainty generally foster volatility and while unnerving for some it could also provide both short term and long-term opportunities Yes their active management skills would be tested - but this situation provides a great stage for active managers to prove their mettle

Actively managed hedge funds by the very premise of their name are expected to provide return in excess of their respective benchmarks and protect capital of the investors in times of turmoil For instance macro hedge funds focused on currencies interest rates and commodities have withstood in this market capitulation Socieacuteteacute Geacuteneacuteralersquos CTA indices are in positive territory in April after a flat March emphasising the CTAsrsquo ability to generate lsquocrisis alpharsquo According to Forbes Alan Howardrsquos all-important Brevan Howard hedge fund significantly outperformed the market and returned 23 in Q1 2020 Similarly Andrew Lawrsquos Caxton Global Investment macro hedge fund returned 72 YTD as of 27 March according to an HSBC survey of hedge funds On the other hand Robert Gibbinsrsquo Autonomy Capital Ray Daliorsquos Bridgewater Associates the worldrsquos largest hedge fund fell 20 and 16 respectively in March 2020

Looking ahead quality launches are expected to continue According to NY Times eight or more European hedge funds are introducing portfolios based on the underlying theme of revival of corporate debt and emerging markets in the post COVID-19 world According to reports from Thomson Reuters industry interaction suggests that seven hedge funds with mandates in credit and equities are in various stages of new portfolio launches since the beginning of March 2020 According to HFM industry observers believe 2020 should see the number of new hedge fund launches at least match those in recent years (15 in H1 2018 and 21 in H1 2019)

VOLATILITY FRIEND ANDOR FOE

9000 600

500

400

300

200

100

8000

7000

6000

4000

5000

2000

3000

1000

1-Aug-19 1-Sep-19 1-Oct-19 1-Nov-19 1-Dec-19 1-Jan-19 1-Feb-19 1-Mar-19 1-Apr-19

SampP 500 Volume (mn)CBOE VIX (LHS)

CB

OE

VIX

Volu

me

(mill

ion

)

SampP 500 Volume vs CBOE VIX

- -

wwwsganalyticscom

7

SGA Whitepaper | May 2020

HEDGE FUNDS ndash SURVIVAL OF THE FITTESTThat said while continued high-quality launches are encouraging the overall number of hedge funds has been declining and there is a growing fear that smaller hedge funds (with less than a billion dollars in assets under management or AuM) might be at risk of survival In addition it is not so easy to grow AuM hedge funds have witnessed net outflows in 13 of the past 17 consecutive quarters according to data from Financial Times Healthy financial markets kept the overall AuM at around USD 3tn despite number of funds shrinking for the past few years However end clients continue to question the ldquo2 and 20rdquo fee structure as returns have failed to impress Consequently the hedge fund industry has conceded some of the AuM to private equity industry in 2019 AuM of the hedge fund industry lagged private equity peers by ~20

In Q1 2020 the AuM of the hedge fund industry have gone below USD 3tn for the first time since 2014 reflecting redemptions and performance declines according to eVestment hedge fund asset flows report The report puts the industry AUM at USD 2949bn In March 2020 heavy outflows of USD 2413bn more than offset the positive flows in Jan and Feb causing net outflow of USD 795bn YTD

Source Hedge Fund Research (HFR) FT The Economist Preqin

10

6

8

2

4

0

2000 2005 2010 2015 2019

Number of hedge funds globally (000)

Funds have fallen for five consecutive years

4

2

3

1

0

2009 11 13 15 17 19

Hedge funds

Private equity

Asset under management $trn

wwwsganalyticscom

8

SGA Whitepaper | May 2020

IS THERE A SILVER LININGYes and there are two parts which comprise this silver lining firstly historical trends suggest that the market has always breached its previous peak in the path of long-term recovery Secondly hedge funds have proven to be more resilient than broader financial markets

First let us look at some history of the recovery of financial markets The table below demonstrates the fact that all the major corrections in the market took many days to find a bottom and to recover For instance the global financial crisis took 369 days to reach trough from peak Similarly even though the current crisis is still evolving and may take some more time to find the bottom the long-term recovery prospects remain encouraging

Second the hedge fund industry in general holds up better than the overall market in times of crisis For instance the SampP 500 capitulated 37 in 2008 while the hedge fund industryrsquos performance was down 12 The performance of the industry then improved 14 in 2009 versus a ~265 gain for the SampP 500 Over this two-year period hedge funds outperformed the broader market In Q1 2020 the hedge fund industryrsquos performance was down ~7 (Source HFR) compared to a decline of ~20 for SampP 500 its worst first quarter on record Overall 818 of hedge-funds outperformed the global equity market in the month of March 2020 according to Eurekahedge

SampP 500 has never failed to regain a prior high

Source JPM Private Bank SampP FactSet

Event Prior peak Peak level Trough date Trough level DrawdownPeak to

trough (days)Trough to recovery

(days)

Fed tightening 2131980 11844 3271980 9822 -171 31 77

Fed tightening 11281980 14052 8121982 10242 -271 444 59

Fed tightening 10101983 17265 7241984 14782 -144 206 129

Black Monday 8251987 33677 1241987 22392 -335 73 428

Savings and loan crisis

7161990 36895 10111990 29546 -199 63 89

Asian financial crisis

1071997 98312 10271997 87699 -108 14 29

LTCM collapse 7171998 118675 8311998 95728 -193 31 60

Inflation and Fed tightening

7161999 141878 10151999 124741 -121 65 22

Tech bubble 3242000 152746 1092002 77676 -491 663 1210

Global financial crisis

1092007 156515 392009 67653 -568 369 1058

China currency devaluation

5212015 213082 2112016 182908 -142 190 107

Low volatility unwind

1262018 287287 282018 2581 -102 9 141

Fed tightening + trade war

9202018 293075 12242018 23511 -198 67 86

Coronavirus outbreak

2192020 338615 2272020 297876 -120 6

Average -234 171 269

wwwsganalyticscom

9

SGA Whitepaper | May 2020

9

Hedge fund industryrsquos resilience against broader markets

Source HFR FT

Performance ()

Credit hedge funds

Emerging markets

Relative value arbitrage

Global macro

Merger arbitrage

Market-neutral funds

Equity hedge funds

March Year-to-date

Hedge fund industry

-20 -15 -10 -5 0

wwwsganalyticscom

10

SGA Whitepaper | May 2020

FORTUNE FAVOURS THE ldquoPRUDENTLYrdquo BRAVE

Active managers Wealth creation

Testing timesBusiness model

Opportunities

wwwsganalyticscom SGA Whitepaper | May 2020wwwsganalyticscom SGA Whitepaper | May 2020

There is no evidence yet of panic selling from private clients as they are prepared to ride out the storm unlike what we witnessed during the sub-prime crisis This is arguably once-in-a-cycle opportunity for active managers as they review their allocation strategy question the quality and resilience of business models managementrsquos pedigree and balance sheet strengths of the companies under coverage - and of course scrutinise valuations after considering all the aforementioned parameters Even in this environment there will be earnings growth from companies which find themselves on the right side of the scale eg healthcare firms technology companies to name a few Conversely there are also opportunities to take short positions on companies either severely affected by weak demand or the ones expected to languish in a recessionary environment

The COVID-19 situation is still evolving and in testing times wealth creation as well as protection becomes challenging In such times it can be well argued that the cost-light model and liquidity of passive investing will continue to remain attractive That said it is equally true that volatility brings opportunity and while volatility will attack portfolios thoughtful diversification and prudent asset allocation can overturn such assaults Thatrsquos what active asset management delivers best ndash and hence should become increasingly important in the coming quarters In the words of the famous author J K Rowling

ldquoIt is our choices that show what we truly are far more than our abilitiesrdquo

wwwsganalyticscom

11

SGA Whitepaper | May 202011

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

About the Authors

Rajib DasSenior Manager ndash ResearchRajib has 12 years of experience as an Investment Research professional He has extensively worked with both the buy- and sell-side equity research companies He is an MBA (Finance and Systems) with immense research expertise across sectors and regions

Mayuresh WaghVP ndash ResearchMayuresh has over 12 years of experience in catering to research needs of buy-side and sell-side clients across the globe Starting his career as an equity analyst Mayuresh covered various sectors such as banking telecom and industrials before moving into a leadership role He has rich experience in setting up research engagements designing optimum workflow and process and actively managing client accounts to achieve delivery excellence

He is a Bachelor of Computer Sciences and completed his post-graduation (MBA) in Finance In his free time Mayuresh enjoys playing cricket listening to classical music and reading

wwwsganalyticscom

7

SGA Whitepaper | May 2020

HEDGE FUNDS ndash SURVIVAL OF THE FITTESTThat said while continued high-quality launches are encouraging the overall number of hedge funds has been declining and there is a growing fear that smaller hedge funds (with less than a billion dollars in assets under management or AuM) might be at risk of survival In addition it is not so easy to grow AuM hedge funds have witnessed net outflows in 13 of the past 17 consecutive quarters according to data from Financial Times Healthy financial markets kept the overall AuM at around USD 3tn despite number of funds shrinking for the past few years However end clients continue to question the ldquo2 and 20rdquo fee structure as returns have failed to impress Consequently the hedge fund industry has conceded some of the AuM to private equity industry in 2019 AuM of the hedge fund industry lagged private equity peers by ~20

In Q1 2020 the AuM of the hedge fund industry have gone below USD 3tn for the first time since 2014 reflecting redemptions and performance declines according to eVestment hedge fund asset flows report The report puts the industry AUM at USD 2949bn In March 2020 heavy outflows of USD 2413bn more than offset the positive flows in Jan and Feb causing net outflow of USD 795bn YTD

Source Hedge Fund Research (HFR) FT The Economist Preqin

10

6

8

2

4

0

2000 2005 2010 2015 2019

Number of hedge funds globally (000)

Funds have fallen for five consecutive years

4

2

3

1

0

2009 11 13 15 17 19

Hedge funds

Private equity

Asset under management $trn

wwwsganalyticscom

8

SGA Whitepaper | May 2020

IS THERE A SILVER LININGYes and there are two parts which comprise this silver lining firstly historical trends suggest that the market has always breached its previous peak in the path of long-term recovery Secondly hedge funds have proven to be more resilient than broader financial markets

First let us look at some history of the recovery of financial markets The table below demonstrates the fact that all the major corrections in the market took many days to find a bottom and to recover For instance the global financial crisis took 369 days to reach trough from peak Similarly even though the current crisis is still evolving and may take some more time to find the bottom the long-term recovery prospects remain encouraging

Second the hedge fund industry in general holds up better than the overall market in times of crisis For instance the SampP 500 capitulated 37 in 2008 while the hedge fund industryrsquos performance was down 12 The performance of the industry then improved 14 in 2009 versus a ~265 gain for the SampP 500 Over this two-year period hedge funds outperformed the broader market In Q1 2020 the hedge fund industryrsquos performance was down ~7 (Source HFR) compared to a decline of ~20 for SampP 500 its worst first quarter on record Overall 818 of hedge-funds outperformed the global equity market in the month of March 2020 according to Eurekahedge

SampP 500 has never failed to regain a prior high

Source JPM Private Bank SampP FactSet

Event Prior peak Peak level Trough date Trough level DrawdownPeak to

trough (days)Trough to recovery

(days)

Fed tightening 2131980 11844 3271980 9822 -171 31 77

Fed tightening 11281980 14052 8121982 10242 -271 444 59

Fed tightening 10101983 17265 7241984 14782 -144 206 129

Black Monday 8251987 33677 1241987 22392 -335 73 428

Savings and loan crisis

7161990 36895 10111990 29546 -199 63 89

Asian financial crisis

1071997 98312 10271997 87699 -108 14 29

LTCM collapse 7171998 118675 8311998 95728 -193 31 60

Inflation and Fed tightening

7161999 141878 10151999 124741 -121 65 22

Tech bubble 3242000 152746 1092002 77676 -491 663 1210

Global financial crisis

1092007 156515 392009 67653 -568 369 1058

China currency devaluation

5212015 213082 2112016 182908 -142 190 107

Low volatility unwind

1262018 287287 282018 2581 -102 9 141

Fed tightening + trade war

9202018 293075 12242018 23511 -198 67 86

Coronavirus outbreak

2192020 338615 2272020 297876 -120 6

Average -234 171 269

wwwsganalyticscom

9

SGA Whitepaper | May 2020

9

Hedge fund industryrsquos resilience against broader markets

Source HFR FT

Performance ()

Credit hedge funds

Emerging markets

Relative value arbitrage

Global macro

Merger arbitrage

Market-neutral funds

Equity hedge funds

March Year-to-date

Hedge fund industry

-20 -15 -10 -5 0

wwwsganalyticscom

10

SGA Whitepaper | May 2020

FORTUNE FAVOURS THE ldquoPRUDENTLYrdquo BRAVE

Active managers Wealth creation

Testing timesBusiness model

Opportunities

wwwsganalyticscom SGA Whitepaper | May 2020wwwsganalyticscom SGA Whitepaper | May 2020

There is no evidence yet of panic selling from private clients as they are prepared to ride out the storm unlike what we witnessed during the sub-prime crisis This is arguably once-in-a-cycle opportunity for active managers as they review their allocation strategy question the quality and resilience of business models managementrsquos pedigree and balance sheet strengths of the companies under coverage - and of course scrutinise valuations after considering all the aforementioned parameters Even in this environment there will be earnings growth from companies which find themselves on the right side of the scale eg healthcare firms technology companies to name a few Conversely there are also opportunities to take short positions on companies either severely affected by weak demand or the ones expected to languish in a recessionary environment

The COVID-19 situation is still evolving and in testing times wealth creation as well as protection becomes challenging In such times it can be well argued that the cost-light model and liquidity of passive investing will continue to remain attractive That said it is equally true that volatility brings opportunity and while volatility will attack portfolios thoughtful diversification and prudent asset allocation can overturn such assaults Thatrsquos what active asset management delivers best ndash and hence should become increasingly important in the coming quarters In the words of the famous author J K Rowling

ldquoIt is our choices that show what we truly are far more than our abilitiesrdquo

wwwsganalyticscom

11

SGA Whitepaper | May 202011

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

About the Authors

Rajib DasSenior Manager ndash ResearchRajib has 12 years of experience as an Investment Research professional He has extensively worked with both the buy- and sell-side equity research companies He is an MBA (Finance and Systems) with immense research expertise across sectors and regions

Mayuresh WaghVP ndash ResearchMayuresh has over 12 years of experience in catering to research needs of buy-side and sell-side clients across the globe Starting his career as an equity analyst Mayuresh covered various sectors such as banking telecom and industrials before moving into a leadership role He has rich experience in setting up research engagements designing optimum workflow and process and actively managing client accounts to achieve delivery excellence

He is a Bachelor of Computer Sciences and completed his post-graduation (MBA) in Finance In his free time Mayuresh enjoys playing cricket listening to classical music and reading

wwwsganalyticscom

8

SGA Whitepaper | May 2020

IS THERE A SILVER LININGYes and there are two parts which comprise this silver lining firstly historical trends suggest that the market has always breached its previous peak in the path of long-term recovery Secondly hedge funds have proven to be more resilient than broader financial markets

First let us look at some history of the recovery of financial markets The table below demonstrates the fact that all the major corrections in the market took many days to find a bottom and to recover For instance the global financial crisis took 369 days to reach trough from peak Similarly even though the current crisis is still evolving and may take some more time to find the bottom the long-term recovery prospects remain encouraging

Second the hedge fund industry in general holds up better than the overall market in times of crisis For instance the SampP 500 capitulated 37 in 2008 while the hedge fund industryrsquos performance was down 12 The performance of the industry then improved 14 in 2009 versus a ~265 gain for the SampP 500 Over this two-year period hedge funds outperformed the broader market In Q1 2020 the hedge fund industryrsquos performance was down ~7 (Source HFR) compared to a decline of ~20 for SampP 500 its worst first quarter on record Overall 818 of hedge-funds outperformed the global equity market in the month of March 2020 according to Eurekahedge

SampP 500 has never failed to regain a prior high

Source JPM Private Bank SampP FactSet

Event Prior peak Peak level Trough date Trough level DrawdownPeak to

trough (days)Trough to recovery

(days)

Fed tightening 2131980 11844 3271980 9822 -171 31 77

Fed tightening 11281980 14052 8121982 10242 -271 444 59

Fed tightening 10101983 17265 7241984 14782 -144 206 129

Black Monday 8251987 33677 1241987 22392 -335 73 428

Savings and loan crisis

7161990 36895 10111990 29546 -199 63 89

Asian financial crisis

1071997 98312 10271997 87699 -108 14 29

LTCM collapse 7171998 118675 8311998 95728 -193 31 60

Inflation and Fed tightening

7161999 141878 10151999 124741 -121 65 22

Tech bubble 3242000 152746 1092002 77676 -491 663 1210

Global financial crisis

1092007 156515 392009 67653 -568 369 1058

China currency devaluation

5212015 213082 2112016 182908 -142 190 107

Low volatility unwind

1262018 287287 282018 2581 -102 9 141

Fed tightening + trade war

9202018 293075 12242018 23511 -198 67 86

Coronavirus outbreak

2192020 338615 2272020 297876 -120 6

Average -234 171 269

wwwsganalyticscom

9

SGA Whitepaper | May 2020

9

Hedge fund industryrsquos resilience against broader markets

Source HFR FT

Performance ()

Credit hedge funds

Emerging markets

Relative value arbitrage

Global macro

Merger arbitrage

Market-neutral funds

Equity hedge funds

March Year-to-date

Hedge fund industry

-20 -15 -10 -5 0

wwwsganalyticscom

10

SGA Whitepaper | May 2020

FORTUNE FAVOURS THE ldquoPRUDENTLYrdquo BRAVE

Active managers Wealth creation

Testing timesBusiness model

Opportunities

wwwsganalyticscom SGA Whitepaper | May 2020wwwsganalyticscom SGA Whitepaper | May 2020

There is no evidence yet of panic selling from private clients as they are prepared to ride out the storm unlike what we witnessed during the sub-prime crisis This is arguably once-in-a-cycle opportunity for active managers as they review their allocation strategy question the quality and resilience of business models managementrsquos pedigree and balance sheet strengths of the companies under coverage - and of course scrutinise valuations after considering all the aforementioned parameters Even in this environment there will be earnings growth from companies which find themselves on the right side of the scale eg healthcare firms technology companies to name a few Conversely there are also opportunities to take short positions on companies either severely affected by weak demand or the ones expected to languish in a recessionary environment

The COVID-19 situation is still evolving and in testing times wealth creation as well as protection becomes challenging In such times it can be well argued that the cost-light model and liquidity of passive investing will continue to remain attractive That said it is equally true that volatility brings opportunity and while volatility will attack portfolios thoughtful diversification and prudent asset allocation can overturn such assaults Thatrsquos what active asset management delivers best ndash and hence should become increasingly important in the coming quarters In the words of the famous author J K Rowling

ldquoIt is our choices that show what we truly are far more than our abilitiesrdquo

wwwsganalyticscom

11

SGA Whitepaper | May 202011

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

About the Authors

Rajib DasSenior Manager ndash ResearchRajib has 12 years of experience as an Investment Research professional He has extensively worked with both the buy- and sell-side equity research companies He is an MBA (Finance and Systems) with immense research expertise across sectors and regions

Mayuresh WaghVP ndash ResearchMayuresh has over 12 years of experience in catering to research needs of buy-side and sell-side clients across the globe Starting his career as an equity analyst Mayuresh covered various sectors such as banking telecom and industrials before moving into a leadership role He has rich experience in setting up research engagements designing optimum workflow and process and actively managing client accounts to achieve delivery excellence

He is a Bachelor of Computer Sciences and completed his post-graduation (MBA) in Finance In his free time Mayuresh enjoys playing cricket listening to classical music and reading

wwwsganalyticscom

9

SGA Whitepaper | May 2020

9

Hedge fund industryrsquos resilience against broader markets

Source HFR FT

Performance ()

Credit hedge funds

Emerging markets

Relative value arbitrage

Global macro

Merger arbitrage

Market-neutral funds

Equity hedge funds

March Year-to-date

Hedge fund industry

-20 -15 -10 -5 0

wwwsganalyticscom

10

SGA Whitepaper | May 2020

FORTUNE FAVOURS THE ldquoPRUDENTLYrdquo BRAVE

Active managers Wealth creation

Testing timesBusiness model

Opportunities

wwwsganalyticscom SGA Whitepaper | May 2020wwwsganalyticscom SGA Whitepaper | May 2020

There is no evidence yet of panic selling from private clients as they are prepared to ride out the storm unlike what we witnessed during the sub-prime crisis This is arguably once-in-a-cycle opportunity for active managers as they review their allocation strategy question the quality and resilience of business models managementrsquos pedigree and balance sheet strengths of the companies under coverage - and of course scrutinise valuations after considering all the aforementioned parameters Even in this environment there will be earnings growth from companies which find themselves on the right side of the scale eg healthcare firms technology companies to name a few Conversely there are also opportunities to take short positions on companies either severely affected by weak demand or the ones expected to languish in a recessionary environment

The COVID-19 situation is still evolving and in testing times wealth creation as well as protection becomes challenging In such times it can be well argued that the cost-light model and liquidity of passive investing will continue to remain attractive That said it is equally true that volatility brings opportunity and while volatility will attack portfolios thoughtful diversification and prudent asset allocation can overturn such assaults Thatrsquos what active asset management delivers best ndash and hence should become increasingly important in the coming quarters In the words of the famous author J K Rowling

ldquoIt is our choices that show what we truly are far more than our abilitiesrdquo

wwwsganalyticscom

11

SGA Whitepaper | May 202011

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

About the Authors

Rajib DasSenior Manager ndash ResearchRajib has 12 years of experience as an Investment Research professional He has extensively worked with both the buy- and sell-side equity research companies He is an MBA (Finance and Systems) with immense research expertise across sectors and regions

Mayuresh WaghVP ndash ResearchMayuresh has over 12 years of experience in catering to research needs of buy-side and sell-side clients across the globe Starting his career as an equity analyst Mayuresh covered various sectors such as banking telecom and industrials before moving into a leadership role He has rich experience in setting up research engagements designing optimum workflow and process and actively managing client accounts to achieve delivery excellence

He is a Bachelor of Computer Sciences and completed his post-graduation (MBA) in Finance In his free time Mayuresh enjoys playing cricket listening to classical music and reading

wwwsganalyticscom

10

SGA Whitepaper | May 2020

FORTUNE FAVOURS THE ldquoPRUDENTLYrdquo BRAVE

Active managers Wealth creation

Testing timesBusiness model

Opportunities

wwwsganalyticscom SGA Whitepaper | May 2020wwwsganalyticscom SGA Whitepaper | May 2020

There is no evidence yet of panic selling from private clients as they are prepared to ride out the storm unlike what we witnessed during the sub-prime crisis This is arguably once-in-a-cycle opportunity for active managers as they review their allocation strategy question the quality and resilience of business models managementrsquos pedigree and balance sheet strengths of the companies under coverage - and of course scrutinise valuations after considering all the aforementioned parameters Even in this environment there will be earnings growth from companies which find themselves on the right side of the scale eg healthcare firms technology companies to name a few Conversely there are also opportunities to take short positions on companies either severely affected by weak demand or the ones expected to languish in a recessionary environment

The COVID-19 situation is still evolving and in testing times wealth creation as well as protection becomes challenging In such times it can be well argued that the cost-light model and liquidity of passive investing will continue to remain attractive That said it is equally true that volatility brings opportunity and while volatility will attack portfolios thoughtful diversification and prudent asset allocation can overturn such assaults Thatrsquos what active asset management delivers best ndash and hence should become increasingly important in the coming quarters In the words of the famous author J K Rowling

ldquoIt is our choices that show what we truly are far more than our abilitiesrdquo

wwwsganalyticscom

11

SGA Whitepaper | May 202011

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

About the Authors

Rajib DasSenior Manager ndash ResearchRajib has 12 years of experience as an Investment Research professional He has extensively worked with both the buy- and sell-side equity research companies He is an MBA (Finance and Systems) with immense research expertise across sectors and regions

Mayuresh WaghVP ndash ResearchMayuresh has over 12 years of experience in catering to research needs of buy-side and sell-side clients across the globe Starting his career as an equity analyst Mayuresh covered various sectors such as banking telecom and industrials before moving into a leadership role He has rich experience in setting up research engagements designing optimum workflow and process and actively managing client accounts to achieve delivery excellence

He is a Bachelor of Computer Sciences and completed his post-graduation (MBA) in Finance In his free time Mayuresh enjoys playing cricket listening to classical music and reading

wwwsganalyticscom

11

SGA Whitepaper | May 202011

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

About the Authors

Rajib DasSenior Manager ndash ResearchRajib has 12 years of experience as an Investment Research professional He has extensively worked with both the buy- and sell-side equity research companies He is an MBA (Finance and Systems) with immense research expertise across sectors and regions

Mayuresh WaghVP ndash ResearchMayuresh has over 12 years of experience in catering to research needs of buy-side and sell-side clients across the globe Starting his career as an equity analyst Mayuresh covered various sectors such as banking telecom and industrials before moving into a leadership role He has rich experience in setting up research engagements designing optimum workflow and process and actively managing client accounts to achieve delivery excellence

He is a Bachelor of Computer Sciences and completed his post-graduation (MBA) in Finance In his free time Mayuresh enjoys playing cricket listening to classical music and reading