The Alternatives Landscape Spring 2021

Alternatives Research | The Alternatives Landscape Spring 2021

The Alternatives Landscape provides a broad overview of the current environment for the primary alternative asset classes: hedge funds, private equity, private credit, real assets, and real estate.

2020 was a year like no other. After a significant downdraft in risk asset class returns during the first quarter, the markets recovered and finished with strong results following the U.S. presidential election and the approval of two vaccines for COVID-19 in November. Public markets ended with strong returns for the year in global stocks and bonds, while alternative asset class results were mixed.

Liquid Strategies- 2020 Return

Returns for alternative asset classes were mostly positive, though varied significantly during 2020. When looking at returns over the trailing twelve months, lower volatility asset classes such as buyout, private credit and real estate produced single-digit returns while growth equity, venture capital, hedge funds, and commodities (with the exception of energy), produced strong double digit returns. Negative returns were found in infrastructure-related areas such as energy, MLPs and REITs.

Illiquid Strategies- One Year Return

Read the full commentary below or down the PDF.

Download PDF


The broad hedge fund universe, as measured by the HFRI Fund Weighted Composite Index, generated an 11.8% return during 2020. At the strategy level, all four core hedge fund strategies produced positive returns, but the equity long/short strategy performance significantly outpaced the rest of the industry.

Hedge Fund Strategy Returns

The equity long/short strategy performed well in the wake of strong global equity market returns and heightened volatility. While the strategy protected capital during the COVID-19 related drawdown earlier in the year, it continued to generate alpha as markets trended higher in the final three quarters. All of the underlying equity long/short strategies were positive except for market neutral funds, which generally have minimal net market exposure. The two largest underlying strategies within the HFRI Equity Hedge Index include the HFRI Fundamental Growth and Fundamental Value indices; both strategies generated double digit returns. As expected, growth-oriented managers and sectors outperformed their value counterparts given the strong performance of growth stocks throughout the year. Technology related industry exposure remained high as it comprised approximately 45% the top 50 hedge funds’ portfolios at year end1.

The event driven strategy performed well given the expanded opportunity set within distressed credit and new equity issuance. Many of the distressed and credit oriented managers opportunistically purchased high yield and investment grade credit given widening credit spreads at the end of the first quarter. These positions performed well as spreads tightened throughout the year. Managers took advantage of the elevated level of SPAC issuance and subsequent appreciation following the announcement of an initial investment in the SPAC trust.

Risk Adjusted Returns Trailing Three Years

Total hedge fund assets under management grew by approximately $423 billion during the second half of the year, as total assets were just under $3.6 trillion. The significant growth was driven by two factors with the most prevalent being strong performance. While the industry experienced net outflows for the year, it also experienced its first two consecutive quarters of positive net cash flows in over two years during the second half of the year as institutional investors began increasing allocations. Overall, the aggregate number of hedge fund managers has declined over the past six years, but this trend moderated in the second half of the year.

Special Purpose Acquisition Company (SPAC) IPOs per Year


After generating solid returns in 2019, private equity markets generated negative returns in the first quarter of 2020 before rebounding nicely in the second and third quarters (though third quarter data is still preliminary). Major private equity indexes continue to outperform public equity indexes over recent time periods, as shown in the first chart, due in part to protecting capital during negative returning quarters as compared to public markets.

Market Performance

The second quarter of 2020 experienced the lowest quarterly tally of deal activity since the third quarter of 2013; however, activity normalized in the third quarter and then set a new quarterly record in the fourth, per PitchBook estimates. On the valuation front, private equity transaction multiples remain elevated, as shown in the labeled U.S. Private Equity: Median Buyout EV/EBITDA Multiples. We believe that heightened valuations persisted due to the high quality of deal flow; companies that were bought and sold in the second half of the year generally weathered pandemic challenges well and emerged just as strong, if not stronger, later in the year. Conversely, in most cases, companies that had operating, liquidity, or debt servicing challenges did not transact at all, or in rare cases were turned over to creditors.

Quarterly U.S. Private Equity Deal Activity

U.S. Private Equity- Median Buyout EV_EBITDA Multiples

While year-end returns in venture capital are still being finalized, exit activity was incredibly strong to end the year. Per PitchBook estimates, U.S. venture capital generated approximately $105 billion and $138 billion in exit value in the third and fourth quarters of 2020, respectively, after generating only $46 billion over the first six months of the year. As it stands today, it looks as if 2020 will set a new annual record for venture capital exit value, surpassing the previous peak set only one year prior. We believe two factors drove this robust activity. First, software is the largest sector within venture capital, and in looking back at 2020, we saw a proliferation in demand for best in class software packages and technologies. As the global workforce shifted to a remote environment, having powerful software tools was critical to the success of businesses and software companies undoubtedly benefitted from that. Second, the routes to exits have changed; direct listings and SPAC exits have joined traditional acquisitions and IPOs as feasible exit routes, giving boards and investors even more options to choose a path that is best suited to set a company up for a strong exit regardless of the economic environment.

U.S. Venture Capital Exit Activity


Following a volatile start to 2020, credit markets experienced a sustained rebound through the second half of the year. As of the end of the fourth quarter, illiquid markets continued to outperform more liquid peers over longer-term trailing periods.

Credit Market Performance

Middle market lending activity in the second quarter slowed to levels not seen since 2009. The third quarter displayed material improvement in credit issuance, followed by significantly more robust activity in the fourth quarter, with direct lenders issuing their second highest quarterly total on record2. However, despite ending the year on a high note, 2020 annual middle market issuance was down 25% versus 2019 and represented the lowest annual volume in the past decade3. Direct lending experienced the smallest decline in volume, down 18% from 2019, while broadly syndicated issuance experienced the largest decline, with volumes down 35%3.
Annual Middle Market Loan Volume ($B)

After widening materially in the second quarter, spreads tightened across credit segments during the second half of 2020, most significantly in broadly syndicated loans. Consequently, direct lending has reassumed its historical advantage versus more liquid credits, from a relative value perspective. Across all middle market loans, all three yield components – Libor floors, Libor spreads, and OIDs (original issue discount) – tightened and contributed to lower yields3.

Credit Market Yield Trends

Unsurprisingly, the economic fallout from the pandemic sowed distress across corporate credit markets. However, after spiking in March to the highest totals since 2009, the number of corporate issuers and corporate bonds trading at distressed pricing (spread to treasuries >1,000 basis points) both receded to pre-pandemic levels. It seems that much of the credit risk investors had been pricing into corporate credit markets early in the pandemic has abated.

Distressed Corporate Issuers and Bonds (Spread -1,000bps)

According to data from Pitchbook, annual fundraising for private debt funds in 2020 totaled $110 billion, down from $152 billion in 2019, and the lowest level raised since 2015. From a strategy perspective, venture debt and direct lending both experienced significant declines in the amount of capital raised, while special situations, infrastructure, and real estate strategies saw their fundraising increase from 20194.


The economic slowdown caused by COVID-19 heavily affected real assets. During 2020, supply and demand shocks impacted real asset prices as global economies shut down, but ongoing fiscal and monetary support, low interest rates, and the vaccine rollout shifted perspectives later in the year. While all real assets subsectors rebounded during the second half of 2020, each ended the year with negative returns aside from natural resource stocks.

Major Real Assets Strategy Returns

Global commodity markets ended 2020 on a strong note with recovering demand buoying prices, though not enough to offset losses from earlier in the year. The impact of inflationary pressures and an expanding money supply put upside pressure on many commodities during the fourth quarter. The declining dollar created a bullish landscape for raw materials. Energy gained 16% as crude oil prices were over 20% higher for the quarter. Investments in gold continued to set new records as prices posted their best annual return in ten years, gaining 25% in 2020.

Renewables and digitization in infrastructure took hold while transportation lagged. In 2020, infrastructure deal flow rose above 2019 levels, and there was a clear preference for infrastructure with contracted revenues as opposed to more economically sensitive opportunities. Renewable energy accounted for over 50% of total transactions, remaining the most active sector for investment activity. Meanwhile, transportation experienced challenges. Activity is recovering for toll roads, but airport recovery is disparate with regional airports managing better than international airports.

Real estate investment trusts (REITs) declined the least during the first half of 2020, but failed to keep pace with the other subsectors during the rebound in the second half of 2020. Although most REIT sector returns were negative in 2020, those with the largest declines earlier in the year posted impressive gains during the fourth quarter.
Commodity Sector Returns
Midstream master limited partnerships (MLPs) had a volatile year as energy sector conditions continued to change. During the first three quarters of the year, low oil prices, slowing production, and election uncertainty negatively impacted MLPs. However, the vaccine announcement, coupled with growing optimism surrounding a reopening economy, helped to improve investor sentiment as the year progressed.

Spot Crude Oil Prices

Gold Prices per Ounce in U.S. Dollars


The disruption caused by the COVID-19 pandemic and associated economic recession is impacting commercial real estate in ways that are continually evolving. The recovery has been uneven and has diverged meaningfully across property types and regions.
As demonstrated in the first chart, income returns held up during the year, only slightly trailing longer-term averages, while appreciation was negatively impacted, and detracted from returns. In aggregate, the income returns were able to outweigh the negative appreciation return, and the NCREIF Property Index climbed a modest 1.6% in 2020.

NCREIF Property Returns (Gross)

A total return disparity remains across real estate sectors in the aftermath of the pandemic, with industrial properties continuing to pace returns while retail and hotel properties struggle to regain momentum. Industrials generated strong income and appreciation during the year and returned 11.8%. Conversely, the retail (-7.5%) and hotel (-25.6%) sectors suffered the most in light of national and local lockdowns. Both the office sector and the apartment sector produced slightly positive returns with income outpacing negative appreciation.

Asset Class Returns (Gross)

As displayed in the chart below, while cap rates have continued to decline—which indicates core real estate’s valuations may be elevated—the corresponding decline in Treasury yields has kept real estate valuations relatively reasonable when compared to the 10-Year Treasury yield. The Federal Reserve has affirmed the intent to keep interest rates low for the foreseeable future to assist in the economic recovery, marking a positive development for commercial real estate.

Cap Rates and Treasury Yields

The last chart illustrates the dramatic drop in net operating income (NOI) growth for real estate. The primary drivers in the declines are the result of the almost complete loss of hotel income and the considerable decrease in retail activity, which was already well underway with the move towards online retail.

NOI Growth (Four Quarter Moving Average)

COVID-19 radically affected the commercial real estate industry and has accelerated longer-term trends that were already present. Real estate values, outside of hotels and to a lesser extent retail, have held up. Returns going forward will be a byproduct of the extent of the economic recovery as well the continued momentum within the industrial and apartment sectors.

1. JPMorgan Q1 2021 Guide to Alternatives
2. Middle Market Weekly, February 12, 2021. Refinitiv LPC
3. Middle Market Weekly, December 18, 2020. Refinitiv LPC
4. Pitchbook, Inc.

Download PDF

Important Disclosures 

The information provided herein is for informational use only and is not to be construed as investment advice. Any opinions herein reflect our judgment as of this date and are subject to change. In no way should the information herein be construed as personal recommendations as it does not take into account the particular investment objectives, financial situations, or needs of individual users.

The information presented is not an offer to buy or sell securities, nor should it be construed as tax or legal advice. The historical information included herein is historical only and is not a guarantee of future performance.

All information contained herein is the confidential and proprietary information of Ellwood or other third parties. Such information may be used only for your purposes and may not be disseminated to third parties without the written consent of Ellwood.

Ellwood obtains information from multiple sources believed to be reliable as of the date of publication; Ellwood, however, makes no representations as to the accuracy or completeness of such third party information. Ellwood has no obligation to update, modify or amend this information or to otherwise notify a reader thereof in the event that any such information becomes outdated, inaccurate, or incomplete. Included in this report are various indices information. All indices are unmanaged and not available for direct investment.

Investments in securities are subject to investment risk, including possible loss of principal. Investments in international securities, even though publicly traded in the U.S., may involve risks which are in addition to those inherent in domestic investments.
Equity investments are more volatile than bonds and subject to greater risks. Small- and mid-cap stocks involve greater risk than large-cap stocks.

Bonds are subject to interest rate, price, and credit risks. Generally when interest rates rise, bond prices fall.

Investments in commodities may have greater volatility than investments in traditional securities.

High-yield fixed income securities are subject to liquidity and credit risk, and tend to be more volatile than investment
grade fixed income.

Alternative investment products, such as hedge funds, private equity, venture capital, private credit, real estates and real assets, are speculative and involve risk. Only investors who understand, and are willing and financially able to assume, the risks of such an investment—including the risk of losing all or substantially all of their investment—should consider investing. Additional risks to consider before investing in alternative investment products include the fact that some products may use leverage that may increase the risk of investment loss, can be illiquid, may involve complex tax structures, and are subject to limited regulatory oversight. For a more detailed discussion of the risks involved with an investment in an alternative investment product, please review the offering materials for the relevant alternative investment product prior to making an investment.

Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

Indices (and associated data) published, administered and/or owned and/or controlled by S&P Dow Jones Indices LLC, its affiliates, and/or their third party licensors and used in this publication have been licensed for use by J.H. Ellwood & Associates, Inc. Copyright © 2020 S&P Dow Jones Indices LLC, its affiliates and/or third party licensors. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

Copyright ©2021 MSCI. Unpublished. All Rights Reserved. This information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used to create any financial instruments or products or any indices. This information is provided on an “as is” basis and the user of this information assumes the entire risk of any use it may make or permit to be made of this information. Neither MSCI, any or its affiliates or any other person involved in or related to compiling, computing or creating this information makes any express or implied warranties or representations with respect to such information or the results to be obtained by the use thereof, and MSCI, its affiliates and each such other person hereby expressly disclaim all warranties (including, without limitation, all warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any other person involved in or related to compiling, computing or creating this information have any liability for any direct, indirect, special, incidental, punitive, consequential or any other damages (including, without limitation, lost profits) even if notified of, or if it might otherwise have anticipated, the possibility of such damages.
The HFRI Fund Weighted Composite Index, HFRI Equity Hedge (Total) Index, HFRI Event-Driven (Total) Index, HFRI ED: Distressed/Restructuring Index, HFRI ED: Merger Arbitrage Index, HFRI Macro (Total) Index, HFRI Relative Value (Total) Index, and the HFRI Fund of Funds Composite Index are being used under license from Hedge Fund Research, Inc., which does not approve of or endorse the contents of this report.

Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. The material may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is an Ellwood Associates presentation of the data. Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in presentation thereof.

Copyright © 2021 PitchBook Data, Inc. All rights reserved. PitchBook Data, Inc. makes no representation or warranty, express or implied, regarding any data it provides, and PitchBook Data, Inc. shall have no liability for any errors, omissions, or interruptions of any data so provided, directly or indirectly, by PitchBook Data, Inc.

Cliffwater Direct Lending Index (the Index) is an index comprised of all underlying assets held by public and private business development companies (a “BDC”) that satisfy certain eligibility requirements. Any information presented prior to the Launch Date (September 30, 2015) of the Index is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-tested calculations are based on the same methodology that was in effect when the Index was officially launched. Please refer to the methodology paper for the Index (available at www. CliffwaterDirect for more details about the Index. Hypothetical performance results have many inherent limitations. No representation is being made that any performance will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of a hypothetical performance record is that decisions relating to the selection of managers and the allocation of assets among those managers were made with the benefit of hindsight based upon the historical rates of return of the selected trading advisors. Therefore, performance records invariably show positive rates of return. Another inherent limitation of these results is that the allocation decisions reflected in the performance record were not made under actual market conditions and, therefore, cannot completely account for the impact of financial risk in actual trading.

FTSE International Limited (“FTSE”) © FTSE 2021. FTSE® is a trade mark of the London Stock Exchange Group companies and is used by FTSE under license. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. FTSE does not promote, sponsor nor endorse the research report.

Source ICE Data Indices, LLC (“ICE DATA”), is used with permission. ICE Data, its affiliates and their respective third party suppliers disclaim any and all warranties and representations, express and/or implied, including any warranties of merchantability or fitness for a particular purpose or use, including the indices, index data and any data included in, related to, or derived therefrom. Neither ICE Data, its affiliates or their respective third party providers shall be subject to any damages or liability with respect to the adequacy, accuracy, timeliness or completeness of the indices or the index data or any component thereof, and the indices and index data and all components thereof are provided on an “as is” basis and your use is at y our own risk. ICE Data, its affiliates and their respective third party suppliers do not sponsor, endorse, or recommend Ellwood or any of its products or services.

Alerian MLP Index”, “Alerian MLP Total Return Index”, “AMZ”, and “AMZX” are trademarks of GKD Index Partners d/b/a Alerian (“Alerian”) and their use is granted under a license from Alerian. Alerian does not guarantee the accuracy and/or completeness of the Alerian MLP Index or any data included therein and Alerian shall have no liability for any errors, omissions, interruptions or defects therein. Alerian makes no warranty, express or implied, representations or promises, as to results to be obtained by Licensee, or any other person or entity from the use of the Alerian MLP Index or any data included therein. Alerian makes no express or implied warranties, representations or promises, regarding the originality, merchantability, suitability, or fitness for a particular purpose or use with respect to the Alerian MLP Index or any data included therein. Without limiting any of the foregoing, in no event shall Alerian have any liability for any direct, indirect, special, incidental, punitive, consequential, or other damages (including lost profits), even if notified of the possibility of such damages.

Indexes referenced on page two, chart one: Indexes referenced on page two, chart one: YTD 2020 and Trailing Three Year Performance as of December 31, 2020. HFRI Fund Weighted Composite Index; HFRI Equity Hedge (Total) Index; HFRI Event-Driven (Total) Index; HFRI ED: Distressed/Restructuring Index; HFRI ED: Merger Arbitrage Index; HFRI Macro (Total) Index; HFRI Relative Value (Total) Index; HFRI Fund of Funds Composite Index.

Indexes referenced on page three, chart one, Market Performance as of June 30, 2020: PitchBook Data, Inc. Equal-Weighted Global Buyout Horizon IRRs; PitchBook Data, Inc. Equal-Weighted Global Growth/Expansion Horizon IRRs; PitchBook Data, Inc. Equal-Weighted Global Venture Capital Horizon IRRs; Russell 3000® Index.

Indexes referenced on page five, chart one: Major Real Assets Strategy Returns. REITS, MLPs Natural Resources Stocks, Commodities and TIPS are represented by FTSE Nareit All REITs TR, Alerian MLP TR USD, S&P Global Natural Resources TR USD, Bloomberg Commodity TR USD and ICE BofA Merril Lynch 1-5 Year US Inflation-Linked Treasury Index, respectively.

Indexes referenced on page five, chart two: Commodity Sector Returns. Industrial Metals are represented by the Bloomberg Industrial Metals Subindex; Precious Metals are represented by the Bloomberg Precious Metals Subindex; Energy is represented by the Bloomberg Energy Subindex; and Agriculture is represented by the Bloomberg Agriculture Subindex.

Published April 1, 2021

Send email Share on LinkedIn Tweet