EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: October 19, 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.

Highlights

  • Our factor-based estimates project that hedge funds gained 0.13% last week on profits from US equities and momentum strategies
  • Hedge funds are now up 1.15% for the month and 0.71% for the year
  • 20 of the 30 strategies we follow posted positive performance
  • Performance was varied across strategies, with returns displaying considerably more idiosyncrasies than we’ve witnessed recently
  • Most non-commodity assets performed well, but energy commodities and Latin American equities struggled
  • Commodity momentum and term structure strategies worked very well, even as commodity beta declined
  • Although index returns are still preliminary, our September end-of-month hedge fund projections appear to have underestimated performance in most strategies

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds gained 0.13% last week on profits from US equities and momentum strategies
  • Hedge funds are now up 1.15% for the month and 0.71% for the year
  • Our factor-attribution analysis suggests positive contributions from equity beta (0.19%), equity country momentum (0.08%), and commodity momentum (0.05%)
  • It indicates negative contributions from alpha (-0.11%), the developed equity-US equity spread (-0.07%), and the MLP-REIT spread (-0.02%)
  • It estimates one week, month-to-date, and year-to-date alphas of -0.11%, -0.22%, and 0.66%, respectively

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Global Benchmarks

  • Most non-commodity assets performed well, but energy commodities and Latin American equities struggled
  • Leaders: gold (2.35%), utilities (2.28%), and precious metals (2.27%)
  • Laggards: energy commodities (-4.86%), oil (-4.84%), and Latin American equities (-3.52%)
  • Equities: most sectors and regions rose, with industrials and MLPs the notable exceptions
  • Bonds: all of our benchmarks gained, with foreign bonds benefitting from currency appreciation
  • Real Estate: performance was strong both domestically and abroad
  • Commodities: precious metals added value, but other commodity sectors were losers
  • Currencies: both developed and emerging currencies rose relative to the US dollar
  • Multi-asset: 60/40 and risk parity strategies gained worldwide, with risk parity outperforming due to strong risk-adjusted bond performance

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Market Factors

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

  • Leaders: commodity term structure (3.58%), US equity momentum (2.60%), and commodity momentum (2.56%)
  • Laggards: US industrials spread (-4.05%), Latin American equity spread (-3.71%), and US equity size (-2.71%)
  • Commodities: beta-driven factors suffered, but momentum and term structure strategies prospered
  • Credit: investment grade term structure strategies gained, while high yield underperformed
  • Equity: momentum strategies performed well, while US industrials, US size and value, and Latin America equities struggled
  • Fixed Income: term structure strategies rose worldwide, while inflation-linked spreads declined
  • Foreign Exchange: FX value joined long developed and emerging market currency indexes in posting gains
  • Multi-Asset Class: momentum, both short and long term, profited while trend following fell
  • Real Estate: US REITs materially outperformed small cap equities and non-US real estate
  • Risk: all of our short volatility and variance factors gained

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September 2015 Estimate Review

  • The indexes underlying our composite indexes have begun reporting returns, but the performance is preliminary and subject to change
  • As currently stands, we correctly predicted the direction of 28 of 30 strategies
  • We were within 25 basis points for five indexes and within 50 basis points for 12
  • Our hit rate was above average, but our accuracy was below average
  • Our initial estimate of -1.63% for our broad hedge fund index differs from the current estimate of -1.11% by 0.52%, a larger difference than normal
  • 20 strategies performed better than we anticipated; 10 performed worse
  • Most accurate: Credit (within 2 basis points), Managed Futures (within 9 bp), and Merger Arbitrage (within 11 bp)
  • Most significant misses: Healthcare (3.07% worse than expected), Latin America (1.69% worse), and Emerging Europe (1.39% better)
  • Overall, our estimates resulted in an 82% reduction in variance relative to naïve forecasts of flat returns

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