EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: November 9, 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 0.29% last week, as profits from US and emerging equities negated losses from developed equities
  • Hedge funds are now up 1.12% for the year
  • 27 of the 30 strategies we follow posted positive performance
  • US equities rallied but most other asset class benchmark indexes experienced large declines
  • Commodities, particularly oil and precious metals, experienced heavy losses
  • US fixed income term structure strategies posted meaningful declines, and foreign government bond spreads did even worse
  • Although many indexes have yet to report performance, our initial October hedge fund return estimate of 1.61% differs from the current estimate of 1.57% by only 0.04%, a smaller difference than normal

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds gained 0.29% last week, as profits from US and emerging equities negated losses from developed equities
  • Hedge funds are now up 1.12% for the year
  • Our factor-attribution analysis suggests positive contributions from equity beta (0.31%), the emerging-developed equity spread (0.13%), and equity sector beta (0.08%)
  • It indicates negative contributions from the developed-US equity spread (-0.42%), the listed private equity spread (-0.04%), and gold (-0.04%)
  • It estimates month-to-date and year-to-date alphas of 0.03% and 0.42%, respectively

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Global Benchmarks

  • US equities rallied but most other asset classes experienced large declines
  • Leaders: US small cap equities (2.79%), financials (2.59%), and energy equities (2.46%)
  • Laggards: oil (-4.94%), precious metals (-4.86%), and gold (-4.70%)
  • Equities: most US sectors and styles performed well while developed foreign equities, emerging European equities, and US utilities struggled
  • Bonds: bonds worldwide suffered declines with the losses particularly large amongst foreign developed government bonds
  • Real Estate: both US and global ex-US real estate declined in excess of 2%
  • Commodities: commodities, particularly oil and precious metals, experienced pronounced losses
  • Currencies: both developed and emerging currencies declined relative to the US dollar
  • Multi-asset: poor bond market performance caused risk parity strategies to significantly underperform 60/40 strategies

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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 market bond-US Treasury spread (3.40%), the US 5-year investment grade-Treasury bond spread (3.32%), and the foreign developed high yield-investment grade spread (3.26%)
  • Laggards: the US utilities-broad market equity spread (-3.53 %), the foreign developed-US Treasury spread (-3.31%), and the US REIT-small cap equity spread (-3.22%)
  • Commodities: commodity beta, momentum, and term structure strategies all struggled
  • Credit: investment grade bonds outperformed US Treasuries, particularly at 5-year maturities
  • Equity: foreign developed equities substantially underperformed US and emerging equities
  • Fixed Income: US term structure strategies posted meaningful declines, and foreign government bond spreads did even worse
  • Foreign Exchange: foreign currencies lagged the US dollar, while alpha strategies showed mixed returns
  • Multi-Asset Class: our short-term momentum factor, normally a loser, posted a healthy 1.88% return
  • Real Estate: US REITs substantially underperformed US equities, but foreign real estate outperformed foreign equities
  • Risk: most short volatility and variance strategies claimed modest gains

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October 2015 Estimate Review

  • Most of the indexes underlying our composite indexes have not yet reported October returns
  • As such, our analysis is preliminary and likely to change significantly over the next few weeks
  • As currently stands, we correctly predicted the direction of 29 of 30 strategies
  • We were within 25 basis points for 15 indexes and within 50 basis points for 20
  • Our hit rate and accuracy was above average
  • Our initial estimate of 1.61% for our broad hedge fund index differs from the current estimate of 1.57% by 0.04%, a smaller difference than normal
  • 18 strategies performed better than we anticipated; 12 performed worse
  • Most accurate: Europe (within 1 basis point), North America (within 1 bp), and Credit (within 6 bp)
  • Most significant misses: Healthcare (3.77% worse than expected), Latin America (1.54% better), and Technology (1.34% better)
  • Overall, our estimates resulted in an 85% reduction in variance relative to naïve forecasts of flat returns

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