EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: August 10, 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.

Eqira’s factor-based projections estimate that hedge funds collectively dropped 0.38% last week as losses in equity markets dragged down returns. Their year-to-date total return now stands at 2.46%.

Global Benchmarks

Risk assets performed poorly as oil-related securities continued to plummet. September WTI crude oil futures fell 6.9%, prolonging their recent slide. They are down 27.6% since June 24, forcing the entire energy complex into a tailspin. Energy equities dropped 3.3% and now find themselves down 15.2% for the year. MLPs, typically less volatile than equities because of their steadier cash flows, bucked their normal behavior and declined a sizeable 8.9%, quickly approaching a 20% decline for the year.

Our US Utilities index was our only equity benchmark to finish the week in positive territory. While foreign developed equities managed to eke out smaller losses than their American cousins, emerging market equities were not so fortunate, losing 1.36% in aggregate. Latin American equities fared particularly poorly, giving up 3.95%.

Longer dated US Treasuries and investment grade bonds served as safe havens, gaining modestly. They were two of a very limited number of places to hide from market declines.

Our US 60/40 and risk parity indexes lost 0.73% and 0.78% for the week, respectively. The global versions fared even worse with the 60/40 index sagging 0.78% and the risk parity index slumping 1.29%.

Market Factors

Trends from last month persisted as energy and emerging market factors continued to slide, while momentum and trend following factors soared.

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 lost 1.6% as crude oil declined 2.4% risk adjusted. Energy equities and MLPs followed oil futures down, with the spread between MLPs and REITs losing just shy of 4%. Emerging market equities trailed foreign developed equities by 0.8%, with the largest losses in Europe and Latin America. Non-US Treasury fixed income factors showed weakness, as did foreign currencies relative to the dollar.

Momentum and trend following strategies gained in most asset classes, with medium-term emerging market equity momentum adding more than 4% and medium-term commodity momentum rising 2%.

Hedge Fund Performance

Our models estimate that hedge funds declined 0.38% last week as losses in US equities dragged down performance. Our factor-attribution analysis indicates that gains from momentum strategies and foreign developed equities were not sufficient to overcome losses from market beta and emerging markets. We forecast that hedge funds globally lost 9 basis points of alpha during the week.

Asset Class1WMTDYTD
Fixed Income-0.01-0.01-0.02
Foreign Exchange0.010.010.16
Multi-Asset Class0.030.03-0.06
Real Estate-0.01-0.010.16
Factor Group1WMTDYTD
EQ: Beta-0.33-0.330.65
EQ: Country Momentum0.100.10-0.14
EQ: Developed Spread0.100.100.58
A: Alpha-0.09-0.090.30
EQ: MLP Spread-0.09-0.09-0.23
EQ: Emerging Spread-0.08-0.08-0.75
CM: Momentum0.070.07-0.03
EQ: Value-0.05-0.050.68
EQ: Sector-0.05-0.05-0.08
MAC: Momentum0.020.02-0.02
CM: Beta-0.02-0.02-0.10

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