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Chronicles of an Allocator

Chronicles: January 2021

Issue 11, January 2021

Welcome to January’s edition of Chronicles.

Looking back, the year 2020 wasn’t exactly a great year for many, but as vaccines are rolled out, economies recover, and stability is restored, there’s still plenty of issues to grapple with as we look to the future.¹ From a market standpoint, the case for diversification has never been stronger as equity markets have largely rebounded to unsustainably high valuations. Looking to 2021, investors may want to renew their focus on finding a combination of undervalued and high-quality investment opportunities, ranging from hedge funds to private credit, as markets decide what to do with the increasing proportion of expensive junk.

Sincerely,

The CAIA Content Team

John L. Bowman, CFA, Senior Managing Director, Twitter, LinkedIn

Keith Black, PhD, CFA, CAIA, FDP, Managing Director Content Strategy, Twitter, LinkedIn

Guowei Jack Wu, CFA, Content Director, CAIA APAC, Twitter, LinkedIn

Aaron Filbeck, CFA, CAIA, CIPM, FDP – Director, Global Content Development, Twitter, LinkedIn

In other news...

Bitcoin passes $40,000 before crashing to $30,000...where are the institutions?

In the first week of 2021, Bitcoin surpassed $38,000, propelling many alt-coins to all-time highs. However, despite strong recent performance, institutional investors have largely avoided the asset class, meaning performance has been driven primarily by individual investors and new entrants from hedge fund managers. (Ref 2)

Africa: the investment opportunity of the decade?

Despite being the largest continent in the world, Africa has been relatively underallocated in investor portfolios, particularly long-term, patient capital. For example, the continent represents 17% of the global population, yet only 4% of global power supply investment. According to a recent Preqin survey, 72% of alternative investments professionals do not have allocations to Africa, and 11% plan to increase their investments by 2025. Accommodative free-trade governments policies combined with the potential supply of foreign private capital and domestic institutional investment could likely be a boon for this under-owned area of the world. (Ref 3 / 4)

Going public: Buyout funds look to SPACs, while VC funds favor direct listings in 2021

PE firms have shown increased appetite for utilizing special-purpose acquisition companies (SPACs) relative to IPOs due to their speed and efficiency when bringing portfolio companies public. After a record-breaking year of SPAC IPO activity, Pitchbook predicts that buyout funds may jump in on the action. Conversely, they also predict that VC funds will quickly move on from engaging in SPACs and opt for direct listings instead. As a reminder, 286 SPACs were launched in 2020, raising more money than those in the previous ten years combined. (Ref 5 / 6)

Private equity ≠ Public equity x Leverage?

What is the right way to estimate the volatility of private equity? One thing not to do is to use blanket leverage multiple on public equity. The authors of a recent paper in the Journal of Alternative Investments suggest using longer return intervals to account for the impact of autocorrelation. Doing this tends to “yield the stubborn conclusion that private equity buyout funds have, on average, similar volatility to large cap listed equities despite their higher leverage.”

Alternative data expected to grow by an annualized rate of 40+% through 2027

Whether data is the new oil, real estate, or gold rush… times are good. Despite often being an attractive headline topic for investment professionals, alternative data only represents $1.6 billion in revenue, a fraction of the total estimated data economy of $1.4-$2.0 trillion. Today, however, more than half of hedge fund managers are utilizing some form of alternative data in their investment process. While 40.7% revenue growth per year is a big number, what’s more interesting is where the growth is coming from: web scraping and financial transactions are sooo 2020, while mobile devices, social media, and satellite data are expected to be the growth engines of tomorrow.

Distressed assets in China may present an opportunity

While many developed nations continue to struggle to contain COVID-19, China has returned to a level of relative normalcy. For investors looking for cheap assets supported by recovery tailwind, distressed credit may present an opportunity. Still, China’s non-performing loan market remains a difficult place to invest, meaning the scope of foreign capital to tap those opportunities will remain relatively limited despite its opportunities.

Unified U.S. government brings potential for investor-first agenda

With the two Georgia Senate races in the rearview, and Democrats taking the Senate, CAIA Association recently urged the incoming Biden-Harris Administration to place a special emphasis on the individual investor with new legislation. Increasing access to alternative investments, ending the ESG-fiduciary war, and propelling our industry forward on issues such as performance presentations, alignment, and fiduciary care are just some of the issues President-elect Biden should consider.

Sovereign Wealth funds place a renewed ESG focus on big tech

Super asset owners, such as sovereign wealth funds, have been pioneers in the realm of sustainable investing, or ESG. Most of the focus, however, has been on environmentally friendly initiatives with a big focus on climate change. Moving forward, these large asset owners will have to wade through the digital economy, where data privacy policies, influence on politics, and ethical conduct are far more nascent.

Referenced Material:

1.) 21 Global Developments to Watch Over the Next Five Years
(https://www.linkedin.com/pulse/21-global-developments-watch-over-next-f…)

2.) Reuters: Hedge fund manager Scaramucci launches cryptocurrency fund
(https://www.reuters.com/article/us-usa-hedge-funds-crypto-currency/hedg…)

3.) News24: Africa heralds onset of free-trade pact after years of talks
(https://www.news24.com/fin24/economy/africa-heralds-onset-of-free-trade…)

4.) CAIA Association: Alternative Investments In Africa
(https://vimeo.com/489001023/3152ef7316)

5.) Pitchbook: 2021 US Private Equity Outlook
(https://pitchbook.com/news/reports/q4-2020-pitchbook-analyst-note-2021-…)

6.) Pitchbook: 2021 US Venture Capital Outlook
(https://pitchbook.com/news/reports/q4-2020-pitchbook-analyst-note-2021-…)

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All posts are the opinion of the contributor. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CAIA Association or the contributor's employer.