EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: July 2015

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

Eqira’s factor-based estimates project that hedge funds collectively dropped 0.07% in July as sharp declines in emerging markets negated gains from domestic equities. Their year-to-date total return now stands at 2.78%.

Global Benchmarks

Defensive equities posted strong performance in July as emerging markets and commodities tumbled. US utilities, REITs and consumer staples stocks each notched total returns in excess of 5%. Broad commodities lost 12.69%, fueled by a 21.46% decline in oil futures and an 11.64% decline in agricultural futures. Losses in oil precipitated an 8.38% drop in US energy stocks. Emerging market equities fell 7.03%, with the largest losses in Latin America. Asian equities followed closely as concerns over China’s steep decline rippled through the region.

Bonds generally performed well as yields fell and curves flattened. The US dollar notched strong gains against foreign currencies, both developed and foreign. The moves were quite pronounced on a risk-adjusted basis. When scaled to an expected annual volatility of 10%, US Treasuries posted gains of 2.30% while foreign developed and emerging currencies lost 2.68% and 4.40%, respectively, relative to the dollar.

Our US 60/40 index gained 1.29% for the month and our US risk parity index increased 2.84%. The global versions were not so fortunate. The 60/40 index rose only 0.45% and the risk parity index added 0.83%.

Market Factors

Like their Global Benchmark counterparts, our commodity, emerging market, and foreign currency market factors each witnessed large losses this month. As is our customary practice, we report and evaluate factor performance using risk-adjusted excess returns (scaled to an expected annual standard deviation of 10%). Broad commodities and oil futures both lost nearly 8%, while emerging market equities underperformed foreign developed equities by 8.42%. US energy and materials equity indexes both trailed the broader market by at least 7.6%. Small caps significantly lagged large caps, as did value stocks to growth stocks.

Commodity term structure, equity momentum, European yield curve, and multi-asset class momentum factors found themselves on the other end of the spectrum, each gaining at least 5%. Notable strategies joining them in positive territory were our US Treasury bond, US yield curve, foreign exchange value, REIT, and short volatility factors.

Hedge Fund Performance

Our models estimate that hedge funds declined 0.07% in July as losses in emerging market equities completely offset gains from US equities. Bets on small cap stocks cost hedge funds 0.22%, but positions in growth stocks helped to negate the losses. This month’s enormous moves in commodity markets had a relatively modest impact on the average hedge fund as commodity exposure produced a mere 16 basis point loss. We forecast 14 basis points of alpha for the month.

Asset ClassMTDYTD
Fixed Income0.00-0.01
Foreign Exchange0.070.15
Multi-Asset Class0.12-0.09
Real Estate0.000.17
Factor GroupMTDYTD
EQ: Emerging Spread-0.48-0.67
EQ: Beta0.450.99
EQ: Size-0.220.21
EQ: Sector-0.18-0.03
EQ: Value0.180.73
A: Alpha0.140.32
CM: Beta-0.10-0.08
EQ: Sector Momentum0.100.20
EQ: MLP Spread-0.10-0.13
EQ: Developed Spread-0.090.48
VOL: Short Volatility0.080.31

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