EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: September 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 1.63% in September as declines in global equity markets once again hampered returns
  • Only three of 30 strategies posted gains, with net long equity strategies suffering the most
  • US REITs, agricultural commodities, utilities, and US Treasury bonds were able to notch positive returns, but most of our other benchmark indexes posted dismal performance
  • MLPs had a horrendous month, losing 16.15%
  • Real estate market factors performed well globally, as did trend following and medium-term momentum strategies both across and within asset classes
  • MLP, high yield bond, inflation-linked bond, and several equity sector spread factors realized large losses
  • Our initial forecast of -1.93% for August’s hedge fund return overestimated actual performance by 0.21%, a good result considering the magnitude of the return
  • Our August forecasts were quite good for the broad indexes, as well as the equity sector, macro, and relative value indexes; they were weak for several equity strategies, including Equity Short-Bias

Hedge Fund Performance

Our factor-based estimates project that hedge funds declined 1.63% in September as losses in equity markets once again crippled returns. Hedge funds, collectively, now stand at a 1.13% year-to-date total loss.

Strategies with long equity exposure suffered. Our Energy sector index declined the most, losing 5.85%. Equity Growth, Latin America, Equity Long Only, Healthcare, and Emerging Europe followed, each losing at least 2.95%. All of our global, equity sector, event driven, relative value, emerging market, and regional indexes declined. Only three strategies posted gains, led by Managed Futures’ 1.49% return. Equity Short-Bias and Commodities rose 1.25% and 0.17%, respectively.


Factor Attribution

Our factor-attribution analysis suggests that US equity beta exposure contributed a 0.73% loss to aggregate hedge fund performance, while bets on foreign developed equities reduced returns by an additional 29 basis points. Losses from MLPs and illiquid assets further exacerbated the fall. We forecast an alpha loss of 15 basis points for the month.


As usual, equity exposure played a prominent role in hedge fund returns this month, with US equity beta providing the greatest contribution to return (albeit generally negative) in 20 out of 30 strategies. The equity market’s losses drove down returns in most strategies, as did sector and foreign developed equity exposure. Credit exposure, both investment grade and high yield, negatively impacted several event driven and relative value strategies, while commodity exposure hurt Energy and Commodities. One bright spot, for emerging market funds at least, was that emerging equities outperformed developed equities.

Energy and Equity Short-Bias each experienced alpha losses in excess of 0.75%, limiting their performance. Several strategies were able to extract positive alpha during the month, but of those only Managed Futures and Commodities were able to produce positive returns overall.

In total, hedge funds sourced more than 100% of their risk and -1.50% of their -1.63% return from beta sources.

Global Benchmarks

September was another rough month as risky assets worldwide extended their August losses. Equities globally tumbled once again, while high yield and emerging bonds, non-agricultural commodities, and foreign currencies also posted dismal performance.

US equities declined 2.84%, with all sectors except utilities losing value. MLPs were especially hard hit, plummeting 16.15% as oil futures dropped 9.47%. Foreign equities fared even worse than domestic equities, with developed market equities losing 4.65% and emerging market equities falling 2.86%. Currency exposure once again worked against foreign investments as developed currencies declined 0.45% relative to the US dollar, while emerging currencies lost 0.80%.

Domestic REITs were one of the few bright spots as they managed to add 3%. US Treasuries also performed well, adding 0.86%. Interestingly, with all the concern we’ve had over the Fed’s possible rate hikes, US government bonds are the best performing assets in our entire benchmark universe year-to-date.

Our US 60/40 index lost 1.44% for the month, while our US risk parity index decreased 0.29%. The global versions performed a bit worse, with the 60/40 index losing 1.94% and the risk parity index declining 1.54%. The levered currency exposure embedded in the global risk parity portfolio was particularly harmful to its performance.



Market Factors

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

Real estate spreads were among the best performing factors this month as US REITs outperformed the broad US market by 3.78% and foreign real estate securities outpaced foreign equities by 4.80%. That strong relative performance combined with horrendous MLP returns led to our US MLP-REIT Spread factor posting the worst return (-8.43%) in our entire factor universe.

Long commodity and short-term commodity momentum factors performed poorly, each losing in excess of 3%. Medium-term momentum and trend following factors notched healthy gains, however.

US equities lost 1.82%, but sector performance varied. Utilities, consumer staples, consumer discretionary, and information technology considerably outperformed the broad market while materials, healthcare, and energy materially underperformed. Small caps trailed large caps and value stocks trailed growth stocks. Momentum and trend following strategies worked well, but foreign developed equities did not.

US Treasury bonds added 2.27%. The European 10Y-1Y term structure did even better, gaining 4.15%. Inflation-linked securities and emerging market bonds suffered.

Foreign currencies continued to perform poorly. Developed currencies lost 0.69% relative to the US dollar, while emerging currencies lost 1.61%. FX carry declined by 2.10%, but FX momentum and value strategies each added more than 2%.

Medium-term multi-asset class momentum and trend following strategies added approximately 2.5% each, while most short volatility factors posted muted performance.


August 2015 Estimate Review

Our August estimates correctly predicted the direction of 28 of 30 strategies. Nine estimates were within 25 basis points of the true index return; six more were within 50 basis points. Our hit rate was above average, but our accuracy was a bit below average, which is not surprising given the volatility and magnitude of last month’s returns.

Our initial estimate of -1.93% for our broad hedge fund index return differs from the current estimate of -2.14% by 21 basis points, which is not bad considering the size of the return. We overestimated performance in 17 strategies, most significantly in Emerging Asia (1.88%), Equity Value (1.73%), and Latin America (1.18%), and underestimated performance in 13, most significantly in Equity Short-Bias (3.23%), Europe (1.32%) and Equity Market Neutral (1.16%).

The magnitude of the Equity Short-Bias estimate error is very surprising. Its size, coupled with the fact that the index gain of 5.19% is larger, in magnitude, than the Equity Long Only loss of 4.70%, even after fees, suggests that short-biased funds were likely employing leverage, perhaps in the form of long puts.

Overall, our forecasts resulted in a 90% reduction in variance relative to naïve forecasts of flat returns. The reduction is greater than normal, but again somewhat expected due to the size of the month’s returns.

Much like last month, we witnessed an unusually high divergence in strategy returns between index providers. The spread between the highest and lowest return in Equity Short-Bias, for example, was a stunningly high 11.87%. The spread is a strong argument in favor of using composite indexes of indexes to evaluate hedge fund returns, rather than individual indexes.


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