Q4 Market Update

The fourth quarter of 2021 was a mirror image of the full year in that U.S. Large Cap Growth equities led equity markets higher.  Developed non-U.S. equities were modestly positive for the quarter while Emerging Markets equities drifted lower.  Investment grade bonds were relatively flat.  Overall, diversified portfolios will have added modestly to the already strong returns in 2021.  The US dollar played a meaningful role in return dispersion across geographies for 2021, strengthening nearly 7% versus a global basket of currencies.

This is the second edition of our white paper mini-series on due diligence red flags in alternative investments. As previewed in the introductory paper, this edition will focus on the process managers use to allocate investment opportunities, i.e., how managers decide which investments go into which funds or accounts. This process, referred to as the investment allocation process, or “allocations” for short, is a critical component to the due diligence process because the interests of the manager and investors are not always aligned.  The paper’s case study will delve into BlueCrest Capital Management Limited (“BlueCrest,” “the Manager,” or “the Firm”) and the conflicts of interest that existed as a result of inadequate compliance processes governing the allocation of resources between the Firm’s flagship fund, that held external client capital, and an internal, employees and affiliates only, fund that ultimately resulted in the Firm agreeing to a $170m settlement with the SEC.

Foreword

In the mid-1800s, French writer Jean-Baptiste Alphonse Karr wrote “plus ça change, plus c’est la même chose” which has been translated into a now popular English phrase “The more things change, the more they stay the same.” For investors, change is an ever-present force that challenges us all. Economies, companies, geopolitical structures, technologies, and trends rise and fall, creating the gyrations in the market we come to know as volatility. As we reflect on the year 2021, change was the dominant theme. The world today seems quite different from the one we lived in this time last year. However, despite that change many things remain the same. The S&P 500 is set to post its 8th calendar year of double-digit returns in the last 10, reflecting a now decade long trend of outperformance. While new risks have emerged, the persistent challenges of elevated valuations and low interest rates remain. Change is almost always uncomfortable, but for those that are thoughtful about its impacts and pro-active about addressing the risks, opportunities can be created.

In this letter, Pathstone’s Chief Investment Office will take a look at the developments of 2021 and offer a perspective on emerging investment trends and themes we are focused on as we look ahead to 2022 and beyond.