Hedge Funds Weekly: September 28, 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

Our factor-based estimates project that hedge funds lost 0.76% last week while our factor-attribution analysis indicates that long equity exposure, both foreign and domestic, was the primary return driver. US equity beta contributed 0.42% towards the loss and the spread between foreign and domestic equities contributed another 0.23%. The losses overpowered gains of 0.06% from foreign developed currencies and 0.11% from alpha. Hedge funds’ aggregate month-to-date and year-to-date performance now stands at -0.87% and -0.34%, respectively.

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News Worth Reading: September 25, 2015

News is overrated. We recommend reducing your daily intake and concentrating instead on hard data and data-rich analysis. That said, there’s always great information out there if you know where to look. The following comprises our list of news worth reading from the past week.

  • Top tier hedge funds appear to be able to time the market (ssrn)
  • Global 60/40 has done a lot worse than US 60/40 over the past year (alphaarchitect)
  • Comparing the realized performance of various asset allocation strategies (ssrn)
  • Simple forecasts beat complex forecasts (alphaarchitect)
  • Solutions shouldn’t be more complicated than necessary (awealthofcommonsense)
  • Risk parity seeks a new approach (ft)
  • A close look at the evolution of endowment management (ssrn)
  • What would Yale do it it were taxable? (etf, cfapubs)
  • Public pension plans are increasing their allocations to hedge funds (dailyalts)
  • JPMorgan predicts pensions will shift hedge fund allocations to low volatility, low beta strategies (pionline)
  • Pensions are going overseas to invest in infrastructure (allaboutalpha)
  • Smart beta still contains a lot of dumb beta (barrons)
  • Jim Simons said trend following stopped working long ago. Is he right? (priceactionlab)
  • It might depend on your definition of trend following (qoppac)
  • The commodities bust continues to depress Latin American economies (institutionalinvestor)
  • Commodities have become more sensistive to macro news since 2008 (ssrn)
  • Emerging market carry trade returns might be able to predict market crashes (ssrn)
  • High credit risk stocks earn more than low credit risk stocks (ssrn)
  • There is a momentum effect in European high yield bonds (ssrn)
  • State Street launches investable private equity replication index (finalternatives)

Hedge Funds Weekly: September 21, 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

Our factor-based estimates project that hedge funds gained 0.05% last week while our factor-attribution analysis indicates that foreign equity spreads were the primary returns drivers. The outperformance of foreign equities relative to US equities contributed 0.15% and emerging equity outperformance contributed another 0.14%. The gains were sufficient to overcome losses from foreign exchange and multi-asset class factors, as well as four basis points of lost alpha. Hedge funds’ collective month-to-date and year-to-date performance now stands at -0.04% and +0.58%, respectively.

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News Worth Reading: September 18, 2015

News is overrated. We recommend reducing your daily intake and concentrating instead on hard data and data-rich analysis. That said, there’s always great information out there if you know where to look. The following comprises our list of news worth reading from the past week.

  • Ray Dalio defends risk parity (cnbc)
  • So do we (eqira)
  • Factor models can only tell you so much (alphaarchitect)
  • You have to account for beta when evaluating hedge fund performance (hedgefundintelligence)
  • Stop comparing everything to the S&P 500 (bloombergview)
  • Every major asset class has a negative year-over-year return (capitalspectator)
  • Forget beating the market, perhaps simply matching the market should be the real goal (awealthofcommonsense)
  • Hedge funds are coming to small investors with $100k minimums (barrons)
  • Hedge funds are thirsty as hell for decision-making data (dealbreaker)
  • Hedge funds have a habit of revising their returns long after the fact (etf)
  • Does it matter when you rebalance? (capitalspectator)
  • Can investors achieve commodity exposure via equities? (alphaarchitect)
  • Goldman claims its Liquid Alts worked in August because they didn’t lose as much as equities…is losing less “working”? (gs)
  • 10 Questions for a Pension-Fund Manager (bloombergview)
  • Most hedge funds never celebrate their fifth birthday (etf)
  • Hedge funds are are adding cyber crime to their trading arsenal (waterstechnology)
  • Whether passively or actively managed, what matters most in mutual funds are the fees (morningstar)
  • Citadel is going big in New York real estate (finalternatives)
  • CTAs generate alpha and outperformance persists for up to 12 months (ssrn)
  • How to better incorporate views into portfolio optimization (ssrn)
  • Stocks that are more likely to gain big than to lose big have lower mean returns (ssrn)

Contrary to Popular Opinion, Bridgewater Did Not Blow Up the Market

Abstract: In the past several weeks, risk parity funds such as Bridgewater’s All Weather have attracted substantial criticism. The attacks have clustered around two primary notions: firstly, that risk parity is a failure because it did not protect investors during August’s drawdowns and secondly, that risk parity may have caused or at least amplified the market’s sudden losses. In this post, we’ll evaluate the legitimacy of these two claims, as well as provide a deeper understanding of the motivations and behaviors of risk parity funds.

Defining Risk Parity

Most investor portfolios are heavily weighted towards equity risk. A typical 60/40 portfolio, for example, will usually derive 80-90% of its risk from equities since stocks are much more volatile that bonds.

Risk parity is an asset allocation methodology that strives to overcome this problem by creating portfolios that distribute risk roughly equally between assets. There are several ways to do this, but the most common approach is to weight assets by the inverse of their volatility. Doing so increases weights on low volatility assets and decreases weights on high volatility assets so that each asset’s levered or de-levered position has an identical expected volatility.

Most risk parity funds then lever this volatility weighted portfolio to target a specific level of risk. In Bridgewater’s case, this is a 12% annualized standard deviation. The result is a portfolio that has similar total risk to a 60/40 portfolio, but a much more equitable internal distribution of risks.

Risk Parity is a Simple, but Imperfect Solution to a Complicated Problem

The idea behind risk parity is a good one. It results in meaningfully more diversified portfolios. Risk parity is not a perfect strategy, however. It has plenty of faults, including:

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Hedge Funds Weekly: September 14, 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

Our factor-based estimates project that hedge funds gained 0.43% last week as long equity exposure nearly erased hedge funds’ month-to-date losses. Our factor-attribution analysis indicates that equity beta contributed 0.53% towards total return, which was sufficient to overcome seven basis points of lost alpha. Hedge funds’ collective month-to-date and year-to-date performance now stands at -0.05% and +0.77%, respectively.

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News Worth Reading: September 11, 2015

News is vastly overrated. While often entertaining, it’s usually best at obscuring details, overwhelming readers, wasting time and prompting bad decisions. We recommend reducing your daily intake and concentrating instead on hard data and data-rich analysis. That said, there’s always great information out there if you know where to look. The following comprises our list of news worth reading from the past week.

  • Aswath Damodaran dispels myths about the relationship between interest rates and stock prices (aswathdamodaran)
  • Are low yielding bonds still a good stock market hedge? (pragcap)
  • A popular tactical model goes to 100% cash. Now what? (capitalspectator)
  • In defense of risk parity (or any long-term strategy) (awealthofcommonsense)
  • VIX futures trading is changing the dynamics of the volatility market (bloomberg)
  • When chaos hits, small hedge funds do better (wsj)
  • When can you call yourself a great investor? (fool)
  • Should wealthy endowments like Harvard, Yale and Stanford still be tax exempt? (slate)
  • CNBC’s fundamental stock pickers offer no real value (valuewalk, ssrn)
  • Russell takes another look at smart beta (dailyalts)
  • Andrew Lo on the market’s August meltdown (bloomberg)
  • China killed the world’s largest stock index futures market (bloomberg)
  • K.K.R. takes 24.9% stake in hedge fund Marshall Wace (nytimes)
  • CalPERS to consider taking activist manager portfolio in-house (pionline)
  • Size and value matter, but not the way you thought (ssrn)
  • Size and momentum profitability in international stock markets (ssrn)

Hedge Funds Weekly: September 7, 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 lost 0.72% last week as equity declines globally again drove down returns. Our factor-attribution analysis indicates that despite producing 23 basis points of positive alpha, hedge funds were unable to overcome losses from equity beta (-0.82%), short volatility strategies (-0.17%), and foreign equities (-0.15%). Their collective performance currently stands as -0.58% month-to-date and +0.24% year-to-date.

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News Worth Reading: September 4, 2015

News is vastly overrated. While often entertaining, it’s usually best at obscuring details, overwhelming readers, wasting time and prompting bad decisions. We recommend reducing your daily intake and concentrating instead on hard data and data-rich analysis. That said, there’s always great information out there if you know where to look. The following comprises our list of news worth reading from the past week.

  • Will econometrics and data science merge? (bloombergview)
  • Anciticpate heavy dispersion in August hedge fund returns (finalternatives)
  • Lightly hedged activist managers had a rough month (hedgeco)
  • How can a strategy still work if everyone knows about it? (aqr)
  • Is the black box hedge fund model doomed? (forbes)
  • Nassim Taleb’s hedge fund made $1 billion on Monday (wsj)
  • Managing downside risk with tail risk parity (dailyalts)
  • AQR investigates four tail-risk mitigation strategies (dailyalts)
  • As volatility soars concerns over risk parity grow (valuewalk)
  • It’s usually not a good idea to blame someone else for your poor performance (ft)
  • Calstrs is considering a big push into hedge funds (wsj)
  • Chicago treasurer to launch database to facilitate aggregate fees for city pension funds (pionline)
  • Low-beta investment strategies (ssrn)
  • Wall street fees and investment returns for 33 state pension funds (ssrn)

Hedge Funds Monthly: August 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.

Highlights

  • We estimate that hedge funds lost 1.93% in August as severe declines in global equity markets hampered returns
  • Only two of 30 strategies posted gains, with net long equity strategies suffering the most
  • REITs, corporate and emerging bonds, agricultural commodities and base metals, and emerging market currencies joined equities in posting dismal performance
  • Short volatility and variance factors were, by far, the worst performing factors as both realized and implied volatility spiked
  • Inter-country equity index momentum and trend following strategies worked very well
  • Our July forecast of -0.07% overestimated actual hedge fund performance by only 3 basis points, a very good result for the model
  • Overall, our July projections were a bit worse than normal, perhaps due to an unusually high level of idiosyncratic returns among hedge funds. The indexes underlying our composite indexes produced atypically large ranges of returns.

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