EQIRA: Empirical and Quantitative Investment Research and Analysis

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.


  • 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.

Hedge Fund Performance

Eqira’s factor-based estimates project that hedge funds declined 1.93% in August as losses in equity markets and short volatility strategies crippled returns. Our factor-attribution analysis indicates that US equity beta exposure contributed a 1.55% loss, while short volatility bets reduced returns by an additional 48 basis points. Gains from small cap stock spreads, equity momentum strategies, and alpha did little to offset the losses. We forecast an alpha gain of 34 basis points for the month. Hedge funds now stand at a 0.76% year-to-date total gain.


Hedge funds strategies with heavy equity exposure suffered mightily. Equity Long Only, Equity Growth, Healthcare, and all four of our emerging market indexes lost at least 3.66%. Numerous other equity and event driven strategies lost at least 2%. The only strategies to post gains were Equity Short-Bias (+1.96%) and Commodities (+0.27%).

All of our relative value composite indexes declined, but their losses were much smaller than the equity-oriented indexes.


Factor Attribution

As usual, equity exposure played a prominent role in hedge fund returns this month, with US equity beta contributing the most return and the most risk in 21 out of 30 strategies. The equity market’s dramatic losses served to drive down returns in most strategies, as did the associated spikes in realized and implied volatilities. Poor returns in emerging market equities significantly dragged down each of our associated emerging market indexes.

Equity Short-Bias, Managed Futures, and Energy each experienced alpha losses in excess of 1%, limiting their performance. Several strategies were able to extract positive alpha during the market’s chaos, but none were able to produce positive returns overall.

Global Benchmarks

Chaos reigned supreme in August as China’s equity markets went into a freefall, losing 12.49%. Equities globally tumbled while REITs, corporate and emerging bonds, agricultural commodities and base metals, and emerging currencies also posted dismal performance. US equities declined 6%, with the losses affecting all sectors. Only telecom (-2.91%), utility (-3.55%), and energy (3.96%) stocks managed to lose less than 5%. Foreign equities fared even worse, with developed stocks losing 6.81% and their emerging market cousins falling 9.32%. Currency factors can largely explain the gap between the two: developed currencies gained 0.49% relative to the US dollar, while emerging currencies lost 3.35%, a total spread of 3.84%.

Real estate suffered, with US REITs declining 6.06% and Global ex-US Real Estate losing 6.55%. Energy commodities and precious metals managed to post gains, as did foreign bonds. US Treasuries were mostly flat.

Our US 60/40 index lost 3.68% for the month, while our US risk parity index decreased 4.86%. The global versions fared similarly, with the 60/40 index losing 3.94% and the risk parity index declining 4.49%.

Market Factors

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

Short volatility factors were, by far, the worst performing factors this month. Both realized and implied volatilities spiked, with equity indexes posting their largest daily losses in years and the VIX tripling in the span of one week. Our capped US and global short variance factors both lost in excess of 17% risk-adjusted, while our short VIX futures factor lost 9.34%.

Inter-country equity index momentum and trend following strategies worked very well, gaining as much as 6% risk-adjusted. Other notable winners included oil and gold futures, foreign high yield spreads, equity size and value factors, FX momentum and value, and developed real estate spreads.

Significant losers included emerging market currencies, FX carry, and equity beta.

Returns to commodity, credit, fixed income, and multi-asset class factors were rather muted considering the steep increase in volatility worldwide.

July 2015 Estimate Review

Our July 2015 estimates correctly predicted the direction of 22 out of 30 indexes. 11 estimates were within 25 basis points of the true index return; eight more were within 50 basis points.

We overestimated performance in 20 strategies, most significantly in Emerging Asia (2.06%) and Equity Value (1.68%), and underestimated performance in 10, most significantly in Commodities (2.40%).

We forecast the broad-based hedge fund index to within 3 basis points, an excellent result for the model.

Overall, our forecasts resulted in an 83% reduction in variance relative to naïve forecasts of flat returns, which is a bit worse than normal. Part of the problem was an unusually high divergence in strategy returns from the various indexes underlying our composite indexes. The spread between the highest and lowest Equity Short-Bias index return, for example, was a whopping 4.93%. Managed Futures showed a similarly large gap of 3.47%.


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