EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: November 16, 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 lost 0.98% last week, as declining global equities overwhelmed other risk factors
  • Hedge funds are now down 0.60% for the month and up only 0.22% for the year
  • Only 2 of the 30 strategies we track earned positive returns
  • Risky assets worldwide plunged, while fixed income products posted modest gains
  • Commodity beta and crude oil factors declined significantly, but term structure, momentum, and trend following strategies prospered
  • US and developed market government bond spreads gained, while riskier bond and credit strategies fell
  • 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 lost 0.98% last week, as declining global equities overwhelmed other risk factors
  • Hedge funds are now down 0.60% for the month and up only 0.22% for the year
  • Our factor-attribution analysis suggests positive contributions from the spread between developed and US equities (0.30%), equity size (0.07%), and the spread between listed private equities and US equities (0.04%)
  • It indicates negative contributions from equity beta (-0.95%), alpha (-0.13%), and the spread between emerging and developed equities (-0.12%)
  • It estimates month-to-date and year-to-date alphas of -0.04% and 0.35%, respectively

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Global Benchmarks

  • Risky assets worldwide plunged, while fixed income products posted modest gains
  • Leaders: developed ex-US investment grade bonds (0.61%), developed ex-US government bonds (0.51%), and US 10-year Treasuries (0.48%)
  • Laggards: oil (-7.81%), energy commodities (-6.95%), and MLPs (-6.14%)
  • Equities: only utilities and developed Asia-Pacific equities managed to eke out gains
  • Bonds: investment grade and government bonds worldwide benefited from equity drawdowns, while high yield and emerging bonds fell
  • Real Estate: both US and global ex-US real estate declined in excess of 2% for the second straight week
  • Commodities: commodities, particularly oil and the energy complex, experienced pronounced losses
  • Currencies: developed currencies appreciated modestly relative to the US dollar while emerging currencies declined
  • Multi-asset: both 60/40 and risk parity strategies posted losses, but risk parity outperformed due to the strength in fixed income markets

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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 US utilities-US equities spread (3.09%), commodity trend following (2.95%), and the developed Asia-Pacific-developed equities spread (2.42%)
  • Laggards: commodities (-2.71%), emerging market equity value (-2.67%), and crude oil (-2.66%)
  • Commodities: commodity beta and crude oil posted significant declines, but term structure, momentum, and trend following strategies prospered
  • Credit: credit spread strategies fell along with equities
  • Equity: equities declined worldwide, along with equity size and value factors; developed equities outperformed US equities, however, and momentum strategies were profitable
  • Fixed Income: US and developed market government bond spreads gained, while riskier bond strategies fell
  • Foreign Exchange: emerging currencies significantly underperformed the US dollar, while alpha strategies posted mixed, but muted returns
  • Multi-Asset Class: short-term momentum lagged, but medium-term momentum and trend following strategies earned positive returns
  • Real Estate: real estate securities outperformed equities worldwide
  • Risk: most short volatility and variance strategies declined, with our short VIX futures factor suffering the most significantly

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October 2015 Estimate Review

  • Many of the indexes underlying our composite indexes have reported October returns, but our analysis is still preliminary and likely to change over the next few weeks
  • As currently stands, we correctly predicted the direction of all 30 strategies
  • We were within 25 basis points for 11 indexes and within 50 basis points for 20
  • Our hit rate and accuracy were both 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
  • 16 strategies performed better than we anticipated; 14 performed worse
  • Most accurate: Hedge Funds (within 4 basis points), Global Macro (within 4 bp), and Emerging Europe (within 8 bp)
  • Most significant misses: Healthcare (1.98% worse than expected), Latin America (1.54% better), and Europe (1.05% worse)
  • Overall, our estimates resulted in a 92% reduction in variance relative to naïve forecasts of flat returns

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