EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: November 30, 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 0.04% last week, as foreign equity underperformance suppressed returns
  • Hedge funds are now up 0.06% for the month and 0.75% for the year
  • 21 of the 30 hedge fund strategies we track earned positive returns
  • Foreign securities underperformed their domestic equivalents as foreign currencies fell relative to the US dollar
  • Emerging market equities were particularly hard hit
  • All commodity sectors except base metals declined, with precious metals experiencing a particularly difficult week
  • Fixed income term structure strategies posted healthy risk-adjusted returns, but non-government securities underperformed
  • Our initial October hedge fund return estimate of 1.61% differs from the current estimate of 1.48% by 0.13%, a slightly smaller difference than normal

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds gained 0.04% last week, as foreign equity underperformance suppressed returns
  • Hedge funds are now up 0.06% for the month and 0.75% for the year
  • Our factor-attribution analysis suggests positive contributions from equity beta (0.09%), equity size (0.08%), and equity country momentum (0.05%)
  • It indicates negative contributions from the spread between developed market equities and US equities (-0.12%), the spread between emerging market equities and developed market equities (-0.10%), and the spread between listed private equities and US equities (-0.06%)
  • It estimates weekly, month-to-date, and year-to-date alphas of -0.02%, -0.23%, and 0.05%, respectively

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Global Benchmarks

  • Foreign securities underperformed their domestic equivalents as foreign currencies fell relative to the US dollar
  • Leaders: US small cap equity (2.08%), US consumer staples (1.70%), and US energy (1.41%)
  • Laggards: emerging EMEA equity (-4.27%), Latin America equity (-3.76%), and emerging market equity (-2.00%)
  • Equities: foreign equities, particularly emerging equities, underperformed US equities
  • Bonds: foreign bonds declined while US bonds rose, but the gains and losses were modest
  • Real Estate: US REITs gained while global real estate securities fell
  • Commodities: all commodity sectors except base metals declined, with precious metals experiencing a particularly difficult week
  • Currencies: both developed and emerging currencies depreciated relative to the US dollar
  • Multi-asset: US 60/40 and risk parity strategies rose, while the global versions fell

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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: US equity size (2.85%), US equity index size (2.69%), and emerging market equity 1-year country momentum (2.01%)
  • Laggards: the US utilities-US equities spread (-1.11%), US equity value (-1.09%), and gold (-1.08%)
  • Commodities: term structure strategies gained, while most other factors fell
  • Credit: most credit strategies were losers as investors favored lower risk securities
  • Equity: size, momentum, and trend following outperformed while value and foreign equity spreads underperformed
  • Fixed Income: term structure strategies posted healthy returns, but non-government securities underperformed
  • Foreign Exchange: both developed and emerging market currencies depreciated relative to the US dollar
  • Multi-Asset Class: medium-term momentum and trend following strategies gained
  • Real Estate: real estate led broad equity indexes both domestically and abroad
  • Risk: each of our short volatility and variance factors notched modest gains

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October 2015 Estimate Review

  • All of the indexes underlying our composite indexes have reported October returns
  • As currently stands, we correctly predicted the direction of all but one of the 30 strategies we index
  • We were within 25 basis points for nine indexes and within 50 basis points for 14
  • 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 1.48% by 0.13%, a slightly smaller difference than normal
  • 13 strategies performed better than we anticipated; 17 performed worse
  • Most accurate: Global Macro (within 8 basis points), Equity Long/Short (within 11 bp), and Convertible Arbitrage (within 13 bp)
  • Most significant misses: Healthcare (2.47% worse than expected), Emerging Europe (1.91% better), and Emerging Asia (1.62% better)
  • Overall, our estimates resulted in an 87% reduction in variance relative to naïve forecasts of flat returns

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