EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: December 21, 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 mixed factor performance led to modest returns
  • Hedge funds are now down 1.38% for the month and 0.40% for the year
  • 17 of the 30 hedge fund strategies we track earned positive returns
  • Aside from emerging equities and real estate securities, most asset classes provided negative returns for the week
  • Bonds fell globally as the Fed raised rates for the first time since before the 2008 financial crisis
  • Developed currencies depreciated significantly relative to the US dollar
  • US equities declined modestly, while small caps, value stocks and country momentum strategies fell
  • Our current November hedge fund index return projection of 0.32% is 0.32% greater than our initial estimate of 0.00%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds gained 0.04% last week as mixed factor performance led to modest returns
  • Hedge funds are now down 1.38% for the month and 0.40% for the year
  • Our factor-attribution analysis suggests positive contributions from the spread between emerging and developed market equities (0.15%), short volatility factors (0.11%) and developed currencies (0.05%)
  • It indicates negative contributions from alpha (-0.22%), equity beta (-0.08%) and equity sector beta (-0.07%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.22%, -0.38% and -0.02%, respectively

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Global Benchmarks

  • Aside from emerging equities and real estate securities, most asset classes provided negative returns for the week
  • Leaders: emerging EMEA equities (6.04%), utilities (2.89%) and emerging market equities (2.31%)
  • Laggards: energy commodities (-3.64%), oil (-3.19%) and materials (-3.08%)
  • Equities: emerging market equities soared, particularly in Europe, but developed market equity performance was negative
  • Bonds: bonds fell globally as the Fed raised rates for the first time since before the 2008 financial crisis
  • Real Estate: real estate securities performed well globally, healthily outpacing equities
  • Commodities: agricultural commodities notched a modest gain, but all other sectors fell, with the energy complex leading the way
  • Currencies: developed currencies depreciated significantly relative to the US dollar, while emerging currencies gained ground
  • Multi-asset: bond underperformance pushed risk parity strategies below 60/40 as 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: short US capped variance (3.25%), the spread between emerging and developed market equities (2.41%) and the US utilities sector spread (2.23%)
  • Laggards: the US materials sector spread (-2.64%), equity value (-2.24%) and developed currencies (-2.14%)
  • Commodities: oil underperformed yet again, but momentum, trend following and term structure strategies gained
  • Credit: most credit strategies declined as investors once again favored lower risk securities
  • Equity: US equities declined modestly, while small caps, value stocks and country momentum strategies fell
  • Fixed Income: most fixed income spread strategies lost value, including term structure and inflation-linked spreads
  • Foreign Exchange: developed currencies posted large losses, while emerging currencies and carry strategies gained
  • Multi-Asset Class: all three of our momentum and trend following factors added value
  • Real Estate: US REITs outpaced foreign securities, but both outperformed equities
  • Risk: all of our short volatility and variance factors gained

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November 2015 Estimate Review

  • Most 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 22 of 30 strategies
  • We were within 25 basis points for 13 indexes and within 50 basis points for 22
  • 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 projection of 0.32% differs from our initial estimate of 0.00% by 0.32%, a larger difference than normal
  • 18 strategies performed better than we anticipated; 11 performed worse
  • Most accurate: Europe (exact), Multi-Strategy (within 1 basis point), and Fixed Income Arbitrage (within 1 bp)
  • Most significant misses: Healthcare (2.88% better than expected), Emerging Europe (2.45% better), and Equity Short-Bias (1.41% worse)
  • Overall, our estimates resulted in a 47% reduction in variance relative to naïve forecasts of flat returns

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