Hedge Funds Weekly: August 31, 2015

The following is an excerpt from our Hedge Funds Weekly report, which is available in the clients section. If you are not yet a client, please request access.

Hedge Fund Performance

Eqira’s factor-based estimates project that hedge funds gained 0.24% last week as equities rallied late to erase sizable losses from earlier in the week. Our factor-attribution analysis indicates that despite losing five basis points of alpha, hedge funds managed to eke out profits behind gains from equity beta and growth stocks. We estimate month-to-date and year-to-date total performance of -1.78% and 0.93%, respectively.

eqira_hf_retatt_20150831

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Why Do Investors Still Favor Long/Short Equity?

In its recent Investor Outlook, Preqin included the following chart describing investor preferences in the hedge fund space. It shows that more than half of the allocators interviewed intend to seek out new or additional long/short equity managers in the next 12 months.

preqin_investor_preferences

Long/short equity is, by far, the most desired strategy. But why?

As we noted in our Strategy Spotlight earlier this week, equity long/short performance has been lackluster for more than a decade now. Consider the following:

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News Worth Reading: August 28, 2015

News is vastly overrated. While often entertaining, it’s usually best at obscuring details, overwhelming readers, wasting time and prompting bad decisions. We recommend reducing your daily intake and concentrating instead on hard data and data-rich analysis. That said, there’s always great information out there if you know where to look. The following comprises our list of news worth reading from the past week.

  • The myths and facts about risk parity (ftalphaville)
  • Preqin’s investor outlook for H2 2015 is out (preqin)
  • A survey of the academic literature regarding hedge funds (ssrn)
  • When to fire a hedge fund (ft)
  • Is hedge fund replication even worth it? (bloombergview)
  • Conquering misconceptions about commodity futures investing (ssrn)
  • Volatility as an asset class (dailyalts)
  • Is dividend yield still a value factor for US equities? (patrickoshag)
  • Risk aversion returns to US equity markets (soberlook)
  • Vanguard is launching another alternative mutual fund (dailyalts)
  • …but alternative mutual funds are not living up to expectations (wsj)
  • BlackRock buys robo-advisor to offer automated advisory to institutional investors (marketwatch)

Hedge Funds Reduced Net Longs Before Recent Correction

This chart of the rolling 10-day beta of the HFRX Global Hedge Fund Index relative to the S&P 500 suggests that hedge funds were reducing their net long stock exposure in advance of the recent market correction. After briefly touching 0.46 in early July, the measure fell steadily to a low of 0.16 in mid-August. It currently stands at 0.22, above its long-run mean of 0.16, but less than half of its near-term high. With only a few days remaining until funds begin reporting August returns, it will be interesting to see the extent to which hedge funds were able to sidestep losses this month.
eqira_hfrx_rolling_beta

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Hedge Funds Weekly: August 24, 2015

The following is an excerpt from our Hedge Funds Weekly report, which is available in the clients section. If you are not yet a client, please request access.

Hedge Fund Performance

Eqira’s factor-based estimates project that hedge funds fell 1.68% last week as equities globally suffered their worst declines in years. Our factor-attribution analysis indicates that an alpha gain of 19 basis points and a 0.16% profit from the spread between foreign stocks and US equities were not sufficient to overcome losses from nearly every other factor of significance, including a 1.46% plunge from equity beta exposure. We estimate month-to-date and year-to-date total performance of -2.17% and 0.56%, respectively.

hedge_fund_attribution_20150821

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News Worth Reading: August 21, 2015

News is vastly overrated. While often entertaining, it’s usually best at obscuring details, overwhelming readers, wasting time and prompting bad decisions. We recommend reducing your daily intake and concentrating instead on hard data and data-rich analysis. That said, there’s always great information out there if you know where to look. The following comprises our list of news worth reading from the past week.

  • Bloomberg claims that hedge funds do half as well as you think (bloomberg, ssrn)
  • We beg to differ (eqira)
  • Are most hedge funds actually passive? (ai-cio, ssrn)
  • No, they aren’t (pragcap)
  • Have hedge funds become less hedged? (valuewalk)
  • Malcolm Gladwell has a meltdown over Yale’s high fee investments (businessinsider)
  • When are hedge funds worth the fees? (cfainstitute)
  • The spread between the best and worst private equity managers is compressing (ft)
  • Funds of funds are outperforming hedge funds (ai-cio)
  • But liquid alternatives can’t keep up (preqin)
  • Some active investing approaches can beat passive strategies over a long time horizon (alphaarchitect)
  • Did we just witness the best risk-adjusted returns ever? (awealthofcommonsense)
  • Yale’s private equity returns are not as high as you think they are (ft)
  • Should you even bother trying to forecast gold prices? (indexologyblog, etf)

Relax, Hedge Funds Do Just as Well as You Thought

Abstract: A new paper argues that annualized hedge fund returns in the Lipper TASS database are 50% lower after adjusting for backfill and survivorship bias. We note that hedge fund index providers already adjust for these biases, and find that the long-term rate of return obtained using their indexes is a better estimate of actual realized returns than the authors’ lowball value. We support our claim using historical fund of funds and endowment returns, both of which are less affected by biases.

In case you missed it, a small, but vocal portion of the Twittersphere blew up on Monday when Bloomberg linked to a new research paper1 claiming that roughly half of hedge funds’ historical annualized return is an illusion caused by reporting biases.

The paper’s authors, Mila Getmansky, Peter Lee, and Andew Lo (hereafter, GLL), used data from the Lipper TASS hedge fund database to compare fund returns before and after adjusting for two well-known biases: backfill and survivorship. They found that hedge funds produced unadjusted returns of 12.6% annually between 1996 and 2014. However, they also calculated that after accounting for the biases, the actual hedge fund return realized by investors was only 6.3%.

There’s a lot of shock value in the disparity between the two calculations. So much so that Bloomberg ran its article with the headline “Hedge Funds Do Half as Well as You Think” which understandably generated a lot of buzz. If long-term hedge fund returns are truly 50% lower than previously reported, hedge fund investors should feel duped and absolutely incensed. But is this really the case?

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Hedge Funds Weekly: August 17, 2015

The following is an excerpt from our Hedge Funds Weekly report, which is available in the clients section. If you are not yet a client, please request access.

Hedge Fund Performance

Eqira’s factor-based estimates project that hedge funds collectively dropped 0.15% last week as losses in equity markets dragged down returns. Their month-to-date and year-to-date total returns now stand at -0.53% and 2.26%, respectively. Our factor-attribution analysis indicates that gains from US equity beta and small cap equities were not sufficient to overcome losses from developed and emerging market equities. We forecast that hedge funds globally lost 9 basis points of alpha.

Asset Class1WMTDYTD
Alpha-0.09-0.180.16
Commodity-0.040.00-0.31
Credit-0.03-0.030.27
Equity-0.06-0.431.18
Fixed Income0.00-0.01-0.02
Foreign Exchange0.000.010.16
Multi-Asset Class0.020.05-0.03
Liquidity0.00-0.010.15
Real Estate0.000.000.17
Volatility0.060.070.54
Risk-Free0.000.000.01
Total-0.15-0.532.26
Factor Group1WMTDYTD
EQ: Developed Spread-0.28-0.180.29
EQ: Beta0.19-0.140.85
EQ: Size0.120.130.34
A: Alpha-0.09-0.180.16
EQ: Emerging Spread-0.08-0.15-0.83
VOL: Developed Spread0.040.050.22
CM: Momentum-0.040.03-0.07
EQ: Value-0.04-0.090.64
EQ: MLP Spread0.04-0.05-0.19
EQ: Sector Momentum-0.04-0.030.18
CR: High Yield Spread-0.02-0.020.34
Total-0.20-0.631.92


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News Worth Reading: August 14, 2015

News is vastly overrated. While often entertaining, it’s usually best at obscuring details, overwhelming readers, wasting time and prompting bad decisions. We recommend reducing your daily intake and concentrating instead on hard data and data-rich analysis. That said, there’s always great information out there if you know where to look. The following comprises our list of news worth reading from the past week.

  • Is the 60/40 portfolio standard a product of a massive bond bull market? (theirrelevantinvestor)
  • When investing in hedge funds, it’s fund age, not size that truly matters (cnbc)
  • To rebalance or not to rebalance (cfainstitute)
  • Do investors realize how much they are really paying private equity managers? (ft)
  • Can computers beat humans in venture capital investing? (fortune)
  • Pensions are reducing their return assumptions (pionline)
  • A closer look at the fall in crude oil (businessinsider)
  • Are MLPs declining more than they should? (sl-advisors)
  • Speculators are riding the dollar higher (shortsideoflong)
  • Emerging markets are not homogeneous (ft)
  • A defense of momentum investing (theirrelevantinvestor)
  • A comprehensive comparison of several momentum strategies (quantsportal)
  • A look at the distribution of value and glamour stock returns (investorfieldguide)
  • Publicly traded money managers are having difficulty attracting assets (pionline)
  • Hedge fund inflows hit 15-month high (reuters)
  • China focused hedge funds took it on the chin in July (hedgeweek)
  • Aberdeen is acquiring fund-of-funds specialist Arden (dailyalts)
  • AQR fired its head of trading after SEC investigation (efinancialnews)
  • Former Stanford endowment head to help Credit Suisse buy hedge fund stakes (wsj)

Understanding Eqira’s Factor Attribution Reports

At Eqira we believe that factor analysis is one of the best tools for evaluating financial time series. The rationale is simple: if we can reasonably approximate an asset’s underlying factor structure, we can better understand that asset’s past and future behavior and open the door for an extraordinary number of advanced analyses. Some of the possibilities include: projecting future risk and return, divining hidden relationships between securities, running stress tests, and, as in the case of our Factor-Based Projections, estimating real-time returns for illiquid securities such as hedge funds. In this report, we discuss how to interpret the factor attribution tables that appear in many of our reports.

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