EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: November 2, 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 0.41% last week, primarily from alpha
  • Hedge funds are now up 1.70% for the month and 0.98% for the year
  • 22 of the 30 strategies we follow posted positive performance
  • Poor foreign equity returns crippled each of our emerging market indexes while growth stock performance aided domestic equity strategies
  • Our oil, MLP, agricultural commodity, and healthcare Global Benchmarks rallied while emerging equities, precious metals, and US bonds suffered
  • Equity momentum strategies, particularly at the country and sector level, performed very well
  • 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 0.41% last week, primarily from alpha
  • Hedge funds are now up 1.70% for the month and 0.98% for the year
  • Our factor-attribution analysis suggests positive contributions from alpha (0.27%), equity value (0.08%), and equity beta (0.06%)
  • It indicates negative contributions from the developed equity-US equity spread (-0.11%) and emerging equity-developed equity spread (-0.10%)
  • It estimates month-to-date and year-to-date alphas of 0.01% and 0.53%, respectively

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Global Benchmarks

  • Oil, MLPs, agricultural commodities, and healthcare stocks rallied while emerging equities, precious metals, and US bonds suffered
  • Leaders: oil (4.46%), healthcare (2.98%), and energy commodities (2.87%)
  • Laggards: emerging EMEA (-2.88%), gold (-1.84%), and precious metals (-1.81%)
  • Equities: emerging equities dipped while most US sectors posted muted returns
  • Bonds: domestic bonds, particularly at longer maturities, were the clear losers
  • Real Estate: both US and global ex-US real estate finished in negative territory
  • Commodities: performance was mixed as energy and agricultural commodities rose while base and precious metals fell
  • 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 once again 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: healthcare-US equity spread (3.24%), 1-year developed equity sector momentum (2.80%), and 1-year developed equity country momentum (2.46%)
  • Laggards: developed equity value (-2.56%), consumer staples-US equity spread (-2.07%), and emerging equity-developed equity spread (-2.06%)
  • Commodities: commodities gained behind oil’s rally, while gold and term structure strategies fell
  • Credit: investment grade bonds outperformed US Treasuries, but credit curve strategies declined
  • Equity: momentum strategies, particularly at the country and sector level, performed very well while value stocks materially underperformed growth stocks
  • Fixed Income: US Treasuries posted meaningful losses
  • Foreign Exchange: FX value had a very strong week, while foreign currencies underperformed the US dollar
  • Multi-Asset Class: trend following strategies posted gains, but momentum strategies did not
  • Real Estate: foreign real estate outperformed US real estate
  • Risk: most short volatility and variance strategies were flat for the week

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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 eight indexes and within 50 basis points for 15
  • 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; seven performed worse
  • Most accurate: Credit (exact), Special Situations (within 2 bp), and Managed Futures (within 5 bp)
  • Most significant misses: Healthcare (3.79% 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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