Alpha Navigator: Quest for Alpha [June 2022]

Almost all asset classes were down amid macro headwinds in first-half of 2022. However, inflationary pressures could be easing. Market-neutral pair trades, factor screens, and thematic baskets.

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Executive Summary

• All major asset classes were down in 1H2022, with the exception of Commodities, which rose 28.2%. Equities corrected significantly, while Gold was flat at -1.4%. U.S. Treasuries were not spared, falling -22.4% due to rising yields. BTC and ETH were the worst performers, dropping 57.3% and 70.4% respectively.

• BTC continues to show strong correlations with other asset classes. During times of severe market stress, correlations between asset classes rise as investors become indiscriminate and risk tolerance goes to zero (cash is king). This results in muted diversification benefits just when it is needed most.

• The U.S. Fed currently needs to curtail demand momentum to control inflation, but this increases recession risks. Looking further out, lower energy costs from demand destruction could lead to disinflationary effects – a potential catalyst for a softening of the Fed stance and an eventual rate hike pause. In this uncertain and low-visibility market environment, we would focus on active selection, and low-volatility/defensive strategies.

• Market-Neutral Pair Trader hunts for strongly correlated tokens whose price ratios currently deviate from historical averages – these can be considered as candidates for a market-neutral pair trade.

• We highlight BTC vs. ETH again, below. Due to BTC’s continued outperformance versus ETH, the BTC/ETH price ratio (BTC price divided by ETH price, in US$) is currently at a peak (2-standard deviation ceiling band). However, the ETH Merge catalyst is still in play for Q3 or Q4, and any return to risk-on sentiment would likely favour ETH.

• We refresh our style-factor screens, which attempt to screen for momentum, value, growth, and risk. Below we highlight our style-factor screen for the top tokens by market cap in the DeFi category. UNI was the only token to have a positive performance in June at +2.9%.

Read the full Alpha Navigator report: Alpha Navigator [June 2022]

Authors

Andrew Ho (Senior Research Analyst)

Alan Lee (Research Analyst)

Research & Insights team

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