EQIRA: Empirical and Quantitative Investment Research and Analysis

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
Fixed Income0.00-0.01-0.02
Foreign Exchange0.000.010.16
Multi-Asset Class0.020.05-0.03
Real Estate0.000.000.17
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

Global Benchmarks

China dominated headlines last week when it unexpectedly devalued its currency. The move precipitated large losses in emerging market currencies, which in turn fueled declines in US dollar-denominated emerging market equities.

Globally, risk aversion seemed to take hold, as fixed income indexes rose and equities fell. The opposite was true domestically, as equities, led by energy and MLP stocks, gained while bonds declined.

US corporate bonds underperformed US Treasuries, which is odd considering the strong performance in US equities. One would have expected corporate credit spreads to tighten instead.

Except for precious metals, the entire commodity complex posted losses. Oil futures are now down more than 30% for the year.

Our US 60/40 and risk parity indexes gained 0.36% and 0.09% for the week, respectively. Globally, risk parity outperformed, gaining 0.41% compared to the 60/40 index’s 0.01% gain.

Market Factors

Note: 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%).

Energy and MLP equities rebounded from last week’s large declines. Energy stocks outperformed the broad US market by 1.94% while MLPs gained 1.72% more than US REITs.

Although foreign developed stocks trailed US stocks by 1.93%, foreign small cap stocks soared past large caps, gaining 3.01% on a relative basis.

Emerging market currencies notched the worst performance of any of our Market Factors, losing 2.74% for the week. They are now down 10.31% for the year.

Credit performed poorly both domestically and globally, as investors preferred government risk to corporate risk in most markets. Momentum strategies also suffered as mean reversion dominated commodity and equity markets.

July 2015 Estimate Review

We have not yet finalized July performance for our hedge fund composite indexes. We do, however, have sufficient data to begin assessing the performance of our end-of-month estimates. As currently stands, we correctly predicted the direction of 27 out of 30 indexes. 16 estimates were within 25 basis points of the true index return; two more were within 50 basis points.

Our initial estimate for our broad hedge fund index differs from the current value by only 3 basis points. We overestimated performance in 18 strategies, most significantly in Emerging Asia (1.20%) and Emerging Europe (1.00%), and underestimated performance in 12, most significantly in Commodities (2.30%).

Overall, our forecasts have resulted in an 88% reduction in variance relative to a naïve forecast of flat returns.


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