EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: December 14, 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 1.19% last week as worldwide equity declines crippled most strategies
  • Hedge funds are now down 1.46% for the month and 0.47% for the year
  • Only two of the 30 hedge fund strategies we track earned positive returns
  • Emerging EMEA equities suffered massive declines, while US energy stocks and MLPs also plummeted
  • Oil continued its protracted decline with another loss in excess of 10%
  • Emerging currencies and FX carry strategies posted large losses, while FX momentum and value strategies gained
  • Momentum and trend following strategies gained in and across most asset classes
  • Although many indexes have yet to report performance, our current November hedge fund index return projection of 0.33% differs from our initial estimate of 0.00% by 0.33%, a larger difference than normal

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds lost 1.19% last week as worldwide equity declines crippled most strategies
  • Hedge funds are now down 1.46% for the month and 0.47% for the year
  • Our factor-attribution analysis suggests positive contributions from the spread between developed market equities and US equities (0.20%), equity sector momentum (0.04%), and FX momentum (0.04%)
  • It indicates negative contributions from equity beta (-1.00%), short volatility (-0.20%), and the spread between emerging market equities and developed market equities (-0.14%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.02%, -0.21%, and 0.13%, respectively

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Global Benchmarks

  • Although high quality bonds posted gains, global equities, oil, and emerging currencies produced large losses that dragged down returns, even to diversified portfolios
  • Leaders: developed ex-US government bonds (1.50%), US 10-Year Treasuries (1.20%), and global aggregate bonds (0.88%)
  • Laggards: oil (-10.67%), energy commodities (-10.56%), and emerging EMEA equities (-10.06%)
  • Equities: emerging EMEA equities suffered massive declines, while US energy stocks and MLPs also plummeted
  • Bonds: government and investment grade bonds performed well, but high yield and emerging market bonds fell along with equities
  • Real Estate: real estate securities declined less than equities, but still posted losses
  • Commodities: base metals notched a modest gain, but all other sectors fell, with the energy complex particularly hard hit
  • Currencies: foreign currencies depreciated significantly relative to the US dollar
  • Multi-asset: bond outperformance helped risk parity strategies outperform 60/40, but all four of our balanced portfolio indexes 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: commodity term structure (3.55%), emerging equity country trend following (3.06%), and commodity trend following (2.86%)
  • Laggards: the US high yield-investment grade spread (-3.89%), emerging market currencies (-3.70%), and crude oil (-3.65%)
  • Commodities: oil underperformed once again, but momentum, trend following and term structure strategies prospered
  • Credit: most credit strategies declined as investors favored lower risk securities
  • Equity: US equities declined, while small caps, value stocks and emerging market equities underperformed; momentum and trend following strategies gained, however
  • Fixed Income: government bonds rose, but inflation-linked and non-Treasury spreads fell
  • Foreign Exchange: emerging currencies and carry strategies posted large losses, while momentum and value strategies gained
  • Multi-Asset Class: all three of our momentum and trend following factors added value
  • Real Estate: US REITS outperformed equities and foreign real estate securities outperformed US REITs
  • Risk: all of our short volatility and variance factors fell

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November 2015 Estimate Review

  • Many of the indexes underlying our composite indexes have reported November returns, but our analysis is still preliminary and likely to change
  • As currently stands, we correctly predicted the direction of 24 of 30 strategies
  • We were within 25 basis points for 16 indexes and within 50 basis points for 21
  • Our hit rate was below average, but our accuracy was above average, mostly due to modest returns in several strategies
  • Our current November hedge fund index return estimate of 0.33% differs from our initial estimate of 0.00% by 0.33%, a larger difference than normal
  • 19 strategies performed better than we anticipated; 11 performed worse
  • Most accurate: Credit (within 1 basis point), Europe (within 2 bps), and Equity Long/Short (within 2 bps)
  • Most significant misses: Healthcare (3.36% better than expected), Emerging Europe (1.46% better), and Latin America (0.95% better)
  • Overall, our estimates resulted in a 50% reduction in variance relative to naïve forecasts of flat returns

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