EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: October 26, 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 0.21% last week, primarily on gains from equity beta
  • Hedge funds are now up 1.40% for the month and 0.92% for the year
  • 18 of the 30 strategies we follow posted positive performance
  • Aside from emerging market, energy, and healthcare funds, strategies with long equity beta exposure tended to show gains
  • Among our Global Benchmarks, most equity sectors and regions performed well, but commodities and MLPs were hit hard
  • Bonds globally struggled as only high yield and emerging market bonds posted gains
  • 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 0.21% last week, primarily on gains from equity beta
  • Hedge funds are now up 1.40% for the month and 0.92% for the year
  • Our factor-attribution analysis suggests positive contributions from equity beta (0.47%), the high yield-investment grade spread (0.07%), and commodity momentum (0.05%)
  • It indicates negative contributions from the developed equity-US equity spread (-0.18%), alpha (-0.08%), and the MLP-REIT spread (-0.07%)
  • It estimates one week, month-to-date, and year-to-date alphas of -0.08%, -0.25%, and 0.59%, respectively

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Global Benchmarks

  • Most equity sectors and regions performed well, but commodities and MLPs were hit hard
  • Leaders: information technology (4.19%), industrials (3.33%), and financials (2.32%)
  • Laggards: oil (-6.54%), MLPs (-3.31%), and energy commodities (-5.00%)
  • Equities: most sectors and regions rose, with MLPs, energy, healthcare, utilities, and emerging EMEA the notable exceptions
  • Bonds: bonds globally struggled as only high yield and emerging market bonds posted gains
  • Real Estate: performance was positive both domestically and abroad
  • Commodities: all commodity sectors lost, with oil-based commodities suffering the most
  • Currencies: both developed and emerging currencies declined relative to the US dollar
  • Multi-asset: 60/40 outperformed risk parity both domestically and globally as bonds significantly underperformed equities

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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: information technology-US equity spread (3.28%), industrials-US equity spread (2.80%), and emerging market-US Treasuries spread (2.68%)
  • Laggards: MLP-REIT spread (-3.22%), healthcare-US equity spread (-3.09%), and US equity size (-3.02%)
  • Commodities: beta-driven factors suffered, but momentum and term structure strategies prospered
  • Credit: emerging market factors lost value, but developed market investment grade and high yield factors gained
  • Equity: there was a strong divergence in US sector returns while MLPs and small cap stocks significantly underperformed REITs and large caps, respectively
  • Fixed Income: most fixed income factors declined, including the developed market government bond-US Treasury spread
  • Foreign Exchange: developed and emerging market currencies depreciated relative to the US dollar, but FX Carry and Momentum both gained in excess of 1%
  • Multi-Asset Class: both short and medium-term momentum strategies gained, but trend following declined
  • Real Estate: most real estate factors declined as real estate underperformed equities globally
  • Risk: all of our short volatility and variance factors gained, while our VIX term structure factor declined

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September 2015 Estimate Review

  • All of the indexes underlying our composite indexes have reported September 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 six indexes and within 50 basis points for 14
  • 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 -1.16% by 0.47%, a larger difference than normal
  • 22 strategies performed better than we anticipated; eight performed worse
  • Most accurate: Credit (within 1 basis point), Managed Futures (within 1 bp), and Merger Arbitrage (within 9 bp)
  • Most significant misses: Healthcare (3.74% worse than expected), Latin America (1.78% 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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