EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: November 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.


  • Our factor-based estimates project that hedge funds were flat last month as foreign equity underperformance and negative alpha wiped out returns from other factors
  • Hedge funds are now up 0.69% for the year
  • Less than half of the hedge fund strategies we index posted positive performance; 21 of 30 produced negative alpha
  • Commodities continued their downward spiral with yet another very bad month
  • Foreign assets struggled primarily as a result of currency depreciation
  • Risk parity strategies underperformed 60/40 as bonds lagged equities
  • Momentum and trend following strategies benefited from trending markets
  • Last month’s hedge fund performance estimate of 1.61% differed from the actual index return of 1.49% by 0.12%, a smaller difference than normal

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds were flat last month as foreign equity underperformance and negative alpha wiped out returns from other factors
  • Hedge funds are now up 0.69% for the year
  • Our factor-attribution analysis suggests positive contributions from equity size (0.16%), equity beta (0.14%), and developed market currencies (0.09%)
  • It indicates negative contributions from the spread between developed market equities and US equities (-0.30%), alpha (-0.27%), and the spread between emerging and developed market equities (-0.12%)
  • It estimates that hedge funds have produced 0.30% of alpha year-to-date


Strategy Performance

  • Less than half of the 30 strategies we follow posted positive performance
  • Leaders: Managed Futures (2.11%), Technology (0.85%), and Healthcare (0.83%)
  • Laggards: Latin America (-2.31%), Energy (-1.67%), and Emerging Europe (-1.22%)
  • Foreign equity spreads surpassed equity beta as the most significant sources of return for the month
  • European funds outperformed US and Asian funds
  • Our models forecast negative alpha in 21 of 30 strategies
  • Alpha leaders: Managed Futures (1.13%), Equity Short-Bias (1.04%), and Emerging Asia (0.50%)
  • Alpha laggards: Special Situations (-1.52%), Distressed Securities (-1.33%), and Event Driven (-0.99%)


Global Benchmarks

  • Commodities had a very bad month, while foreign assets struggled due largely to currency depreciation
  • Leaders: US small cap equities (2.45%), financial equities (1.99%), and industrial equities (1.46%)
  • Laggards: oil (-13.08%), energy commodities (-11.10%), and MLPs (-8.29%)
  • Equities: foreign equities strongly underperformed US equities as a strong dollar crippled currency-adjusted returns
  • Bonds: bonds fell globally, although the losses were more pronounced overseas
  • Real Estate: real estate, particularly foreign real estate, declined
  • Commodities: no sector remained untouched as the entire commodity complex followed oil downward
  • Currencies: both developed and emerging currencies depreciated materially relative to the US dollar
  • Multi-asset: risk parity underperformed 60/40 due to global fixed income weakness; global strategies performed much worse than US-centric strategies



Market Factors

Note: we report factor performance using excess returns risk-adjusted to an expected annual standard deviation of 10%.

  • Leaders: commodity trend following (5.52%), multi-asset class 1-year momentum (3.83%), and emerging market 1-month sector momentum (3.39%)
  • Laggards: developed market equity value (-6.00%), commodity total market (-5.09%), and the spread between emerging and developed equity indexes (-2.06%)
  • Commodities: broad commodities plummeted, to the benefit of momentum and trend following strategies
  • Credit: credit risk earned positive returns both domestically and abroad
  • Equity: foreign equity spreads significantly underperformed; developed market equity value was this month’s worst performing factor on a risk-adjusted basis
  • Fixed Income: developed market government bonds trailed US Treasuries due primarily to currency movements; term structure strategies actually generated greater profits in Europe than in the US
  • Foreign Exchange: carry strategies gained, but other strategies, included long developed and emerging market currencies struggled
  • Multi-Asset Class: momentum and trend following strategies profited from directional markets
  • Real Estate: real estate securities trailed equities in the US, but led equities overseas
  • Risk: short risk strategies notched mixed performance; it was better to be short realized variance than implied volatility



October 2015 Estimate Review

  • All of the indexes underlying our composite indexes have reported October returns
  • We correctly predicted the direction of 29 of 30 strategies
  • We were within 25 basis points for seven indexes and within 50 basis points for 14
  • Our hit rate was above average, but our accuracy was below average due to atypically large strategy returns
  • Our initial estimate of 1.61% for our broad hedge fund index differs from the current estimate of 1.49% by 0.12%, a smaller difference than normal
  • 13 strategies performed better than we anticipated; 17 performed worse
  • Most accurate: Global Macro (within 7 basis points), Energy (within 11 bp), and Equity Long/Short (within 11 bp)
  • Most significant misses: Healthcare (2.49% worse than expected), Emerging Europe (1.81% better), and Emerging Asia (1.49% better)
  • Overall, our estimates resulted in an 88% reduction in variance relative to naïve forecasts of flat returns


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