EQIRA: Empirical and Quantitative Investment Research and Analysis

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.


Global Benchmarks

Concerns over China again dominated headlines as equities globally plummeted, tracking the Shanghai Composite’s 11.5% tumble. US equities lost 5.59% with no sectors immune from the decline. Foreign developed equities modestly outperformed, helped by a 0.98% gain in developed currencies relative to the US dollar.

It was very much a “risk-off” week. Commodities, outside of precious metals, were hard hit, while government bonds outperformed. Oil futures lost another 6.17% and are now down 62.3% over the past year. They briefly fell below $40/barrel in Friday’s trading, setting new multi-year lows. Gold futures, on the other hand, gained 4.22%, helping to reverse a subpar year thus far for the metal. US Treasuries added 0.69%, while foreign government bonds fared even better, gaining 1.70%.

Fixed income gains were nevertheless unable to make up for equity losses. Our US 60/40 and risk parity indexes fell 3.13% and 2.81%, respectively. The global versions performed modestly better, losing 2.72% and 2.15%.

Market Factors

Note: we report and evaluate factor performance using excess returns risk-adjusted to an expected annual standard deviation of 10%.

Asset class returns were unequivocally bad, but there were plenty of ways for hedged investors to profit last week. Alternative commodity strategies were particularly successful, with medium-term momentum, trend following, and term structure factors adding between 2.4% and 3.1% each. Momentum and trend following strategies, in fact, notched gains in most asset classes.

REITs meaningfully outperformed the broad equity indexes, particularly in international markets. US bonds proved a safe haven for those fleeing risk.

Volatility surged globally as the VIX jumped from 12.83 last week to 28.03 at Friday’s close. The spike produced significant losses in each of our short volatility and short variance factors. Short variance strategies were particularly hard hit, losing roughly half of their year-to-date gains.

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 our end-of-month estimates. As currently stands, we correctly predicted the direction of 23 out of 30 indexes. 11 estimates were within 25 basis points of the true index return; eight 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 17 strategies, most significantly in Emerging Asia (1.93%) and Equity Value (1.61%), and underestimated performance in 13, most significantly in Commodities (2.56%).

Overall, our forecasts have resulted in an 82% reduction in variance relative to naïve forecasts of flat returns, which is a bit worse than normal. Part of the problem is that we’ve been seeing an unusually high divergence in strategy returns from the various index providers. The spread between the highest and lowest Equity Short-Bias index return, for example, is a whopping 4.93%. Managed Futures show a similarly large gap of 4.28%.


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