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.
Equities globally showed resilience, bouncing back after China’s “Black Monday” roiled markets. The Shanghai Composite Index plummeted an additional 11.1% and is now down nearly 40% from its June high, but US and emerging market equities managed to squeeze out gains. Fixed income products fell out of favor as bonds declined globally. Income equities such as REITs and utilities also posted meaningful losses. Only MLPs managed to avoid this decline, bolstered by an 11.80% gain in oil futures.
Of our multi-asset class benchmarks, only our US 60/40 index added value. It gained 0.29% while our US risk parity index declined by 0.71%. The global versions were both losers, with the 60/40 index falling 0.03% and the risk parity index dropping 0.81%.
Note: we report and evaluate factor performance using excess returns risk-adjusted to an expected annual standard deviation of 10%.
Short volatility and variance were the worst performing factors last week. Short variance fared particularly poorly as volatility, both realized and implied, spiked dramatically. Equities experienced their biggest single day losses in years while the VIX tripled in the span of a week and doubled in the span of two days, eventually peaking at 40.74 at Tuesday’s close before slipping back to 26.05 at the end of the week.
Momentum and trend following strategies fared poorly amid choppy markets. Yield-oriented factors also declined as investors rotated into growth securities during the late week rebound.
Alternative commodity strategies including momentum and term structure lost value, but oil’s strong performance helped lead our total market factor to a weekly gain. MLPs and energy equities participated in the commodity rally.
July 2015 Estimate Review
All of the indexes underlying our hedge fund composite indexes have reported preliminary returns for July, allowing us to fully evaluate the performance of our month-end estimates.
Little has changed from last week, however, as we continue to have correctly predicted the direction of 23 out of 30 indexes. 13 estimates were within 25 basis points of the true index return; six more were within 50 basis points.
Our initial estimate for our broad hedge fund index differs from the current value by only 1 basis point. We overestimated performance in 19 strategies, most significantly in Emerging Asia (1.93%) and Equity Value (1.66%), and underestimated performance in 11, most significantly in Commodities (2.71%).
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 3.48%.