EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: October 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.

Highlights

  • Our factor-based estimates project that hedge funds gained 1.61% last month, almost entirely from equity beta
  • Hedge funds are now up 0.88% for the year
  • Our models project positive performance in 27 of the 30 strategies we follow, even though we forecast negative alpha in 19 of them
  • Equities had a huge month, gaining 7.62% globally while helping to propel other risky assets towards profits
  • Our 60/40 and risk parity benchmarks earned between 4.6% and 5.0%
  • Although equities soared, small caps materially underperformed large caps and momentum and trend following strategies struggled
  • Last month’s hedge fund performance estimate of -1.63% differed from the actual index return of -1.17% by 0.46%, a larger difference than normal as most strategies earned better than expected returns

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds gained 1.61% last month, almost entirely from equity beta
  • Hedge funds are now up 0.88% for the year
  • Our factor-attribution analysis suggests positive contributions from equity beta (2.06%), equity sector beta (0.13%), and short volatility strategies (0.10%)
  • It indicates negative contributions from equity size (-0.21%), multi-asset class trend following (-0.13%), and liquidity factors (-0.11%)
  • It estimates month-to-date and year-to-date alphas of -0.07% and 0.44%, respectively

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Strategy Performance

  • 27 of the 30 strategies we follow posted positive performance
  • Leaders: Energy (5.04%), Equity Long Only (3.89%), and Emerging Asia (3.24%)
  • Laggards: Equity Short-Bias (-2.42%), Managed Futures (-1.15%), and Commodities (-0.76%)
  • Equity beta provided the bulk of the return in most strategies
  • US funds outperformed Asian and European funds
  • Our models forecast negative alpha in 19 of 30 strategies
  • Alpha leaders: Equity Short-Bias (1.69%), Equity Market Neutral (0.85%), and Europe (0.55%)
  • Alpha laggards: Managed Futures (-1.23%), Technology (-1.02%), and Latin America (-0.85%)

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Global Benchmarks

  • Equities had a huge month, gaining 7.62% globally while helping to propel other risky assets towards profits
  • Leaders: materials equities (13.21%), energy equities (11.52%), and technology equities (10.35%)
  • Laggards: base metals (-2.56%), US 10-Year Treasuries (-0.70%), and energy commodities (-0.68%)
  • Equities: every sector, style, and regional benchmark posted gains, with most profits between 6% and 8%
  • Bonds: foreign bonds outperformed domestic bonds as US Treasuries posted losses
  • Real Estate: both US and global ex-US real estate rose alongside equity markets
  • Commodities: oil, agricultural commodities, and precious metals increased, while base metals struggled
  • Currencies: both developed and emerging currencies appreciated relative to the US dollar
  • Multi-asset: risk parity modestly outperformed 60/40 both domestically and globally, but both allocation strategies performed well

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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: the emerging markets high yield-investment grade spread (6.04%), the US materials equity spread (5.26%), and US equities (5.13%)
  • Laggards: developed country trend following (-5.46%), 1-month US equity sector momentum (-4.55%), and the US utilities equity spread (-2.06%)
  • Commodities: broad commodities were flat, but term structure and momentum strategies posted healthy gains
  • Credit: corporate bonds materially outperformed government bonds worldwide
  • Equity: US equities soared, but small caps significantly underperformed large caps while momentum and trend following strategies struggled
  • Fixed Income: US Treasuries declined, but foreign and non-Treasury fixed income spreads rallied
  • Foreign Exchange: emerging market currencies and FX carry had very strong weeks, while FX momentum and value strategies suffered
  • Multi-Asset Class: trend following strategies were hit hard by the equity rebound
  • Real Estate: real estate underperformed equity markets, particularly overseas
  • Risk: short risk strategies notched healthy gains, led by put writing and short VIX futures

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September 2015 Estimate Review

  • All of the indexes underlying our composite indexes have reported September returns
  • 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 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 -1.17% by 0.46%, a larger difference than normal
  • 21 strategies performed better than we anticipated; nine performed worse
  • Most accurate: Credit (within 2 basis points), Managed Futures (within 3 bp), and Merger Arbitrage (within 6 bp)
  • Most significant misses: Healthcare (3.98% worse than expected), Latin America (1.88% worse), and Emerging Europe (1.61% better)
  • Overall, our estimates resulted in an 81% reduction in variance relative to naïve forecasts of flat returns

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