EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: November 23, 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 0.59% last week, as surging equities lifted returns
  • Hedge funds are now up 0.03% for the month and 0.66% for the year
  • 28 of the 30 hedge fund strategies we track earned positive returns
  • Equities soared globally, while fixed income and commodities underperformed
  • Beta was the primary driver of equity returns worldwide; small caps, growth stocks, and several sectors underperformed the broad indexes
  • Each of our short volatility and variance Market Factors notched healthy returns
  • Although some indexes have yet to report performance, our initial October hedge fund return estimate of 1.61% differs from the current estimate of 1.42% by 0.19%, a slightly larger difference than normal

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds gained 0.59% last week, as surging equities lifted returns
  • Hedge funds are now up 0.03% for the month and 0.66% for the year
  • Our factor-attribution analysis suggests positive contributions from equity beta (0.81%), short volatility strategies (0.05%), and multi-asset class momentum (0.05%)
  • It indicates negative contributions from alpha (-0.21%), the spread between developed market equities and US equities (-0.12%), and equity size (-0.06%)
  • It estimates month-to-date and year-to-date alphas of -0.20% and 0.00%, respectively

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Global Benchmarks

  • Equities soared globally, while fixed income and commodities underperformed
  • Leaders: emerging EMEA equity (5.38%), Latin American equity (4.47%), and US information technology (4.30%)
  • Laggards: base metals (-4.22%), MLPs (-1.21%), and commodities (-0.95%)
  • Equities: only MLPs failed to post positive returns; all other sectors, styles, and regions gained more than 1%
  • Bonds: most of our bond benchmarks posted modest gains, with foreign bonds outperforming US bonds
  • Real Estate: real estate matched strong equity returns, earning at least 3% both domestically and abroad
  • Commodities: all commodity sectors except agriculture declined, with base metals experiencing a particularly difficult week
  • Currencies: developed currencies depreciated very modestly relative to the US dollar while emerging currencies surged
  • Multi-asset: both 60/40 and risk parity strategies posted strong performance, with returns near 2%

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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: short US capped variance (2.18%), multi-asset class 1-month momentum (2.17%), and US equity beta (2.08%)
  • Laggards: the MLP-REIT spread (-2.00%), the developed ex-US real estate-small cap equity spread (-1.90%), and FX momentum (-1.61%)
  • Commodities: long commodity and term structure strategies declined, while momentum and trend following strategies gained
  • Credit: credit spread strategies mostly rose along with equities
  • Equity: beta was the primary driver of equity returns worldwide; small caps, growth stocks, and several sectors underperformed the broad indexes
  • Fixed Income: term structure strategies performed well, as did inflation-linked bond spreads
  • Foreign Exchange: emerging currencies and carry strategies posted strong performance, while momentum and value did the opposite
  • Multi-Asset Class: our three multi-asset class momentum and trend following factors each rose at least 1% risk-adjusted
  • Real Estate: foreign real estate securities underperformed both US REITs and foreign equities
  • Risk: each of our short volatility and variance factors notched healthy returns

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October 2015 Estimate Review

  • Most of the indexes underlying our composite indexes have reported October returns, but our analysis is still preliminary and likely to change
  • As currently stands, we correctly predicted the direction of all 30 strategies
  • We were within 25 basis points for nine indexes and within 50 basis points for 19
  • Our hit rate was above average, but our accuracy was slightly below average, mostly due to the magnitude of the month’s returns
  • Our initial estimate of 1.61% for our broad hedge fund index differs from the current estimate of 1.42% by 0.19%, a slightly larger difference than normal
  • 13 strategies performed better than we anticipated; 17 performed worse
  • Most accurate: Equity Long/Short (within 12 basis points), Global Macro (within 13 bp), and Equity Short-Bias (within 14 bp)
  • Most significant misses: Healthcare (2.65% worse than expected), Latin America (1.20% better), and Europe (0.99% worse)
  • Overall, our estimates resulted in a 90% reduction in variance relative to naïve forecasts of flat returns

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