EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: December 28, 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 0.40% last week as rising equities fueled returns
  • Hedge funds are now down 1.05% for the month and 0.07% for the year
  • 26 of the 30 hedge fund strategies we track earned positive returns
  • Aside from US government and investment grade bonds, most asset classes provided positive returns for the week
  • Equities rallied globally, but most regions underperformed US equities
  • Small caps and value stocks outperformed
  • Government and investment grade bonds fell in the US, but gained overseas
  • Oil and other non-agricultural commodities rebounded moderately
  • Both developed and emerging currencies appreciated relative to the US dollar
  • 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 0.40% last week as rising equities fueled returns
  • Hedge funds are now down 1.05% for the month and 0.07% for the year
  • Our factor-attribution analysis suggests positive contributions from equity beta (0.70%), the spread between US MLPs and equities (0.08%) and short volatility factors (0.07%)
  • It indicates negative contributions from the spread between developed market and US equities (‐0.15%), alpha (‐0.12%) and equity size (‐0.07%)
  • It estimates weekly, month‐to‐date and year‐to‐date alphas of ‐0.12%, ‐0.55% and ‐0.19%, respectively

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Global Benchmarks

  • Aside from US government and investment grade bonds, most asset classes provided positive returns for the week
  • Leaders: US MLPs (14.41%), oil (5.66%) and energy equities (4.73%)
  • Laggards: agricultural commodities (‐2.00%), US 10‐Year Treasuries (‐0.64%) and US 5‐Year Treasuries (‐0.52%)
  • Equities: equities rallied globally, gaining in every major region and sector; MLPs soared
  • Bonds: Government and investment grade bonds fell in the US, but gained overseas
  • Real Estate: real estate securities rose globally, but underperformed equities
  • Commodities: agricultural commodities declined, but all other sectors rose, with the energy complex leading the way
  • Currencies: both developed and emerging currencies appreciated relative to the US dollar
  • Multi‐asset: bond performance pushed US risk parity strategies below 60/40 and global risk parity strategies above 60/40, but all four of our balanced benchmarks rose

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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: the spread between US MLPs and REITs (4.86%), US equity value (2.13%) and oil futures (1.85%)
  • Laggards: commodity 1‐month sector momentum (‐2.59%), the spread between US consumer discretionary equities and the broad market (‐2.04%) and US equity 1‐year momentum (‐1.81%)
  • Commodities: oil rebounded moderately, but momentum, trend following and term structure strategies all fell
  • Credit: strategy performance was mixed, as high yield outperformed in the US, but declined internationally
  • Equity: most regions underperformed US equities, where small caps and value stocks outperformed
  • Fixed Income: inflation‐linked and foreign government bonds gained relative to Treasuries
  • Foreign Exchange: foreign currencies appreciated relative to the US dollar, while momentum and value strategies declined
  • Multi‐Asset Class: all three of our momentum and trend following factors posted very modest gains
  • Real Estate: US REITs outpaced foreign securities, but trailed broad equities
  • Risk: our VIX term structure strategy declined, but each of our other short risk strategies rose

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November 2015 Estimate Review

  • All of the indexes underlying our composite indexes have reported November returns, but our analysis is still preliminary and subject to change
  • As currently stands, we correctly predicted the direction of 20 of 30 strategies
  • We were within 25 basis points for 14 indexes and within 50 basis points for 20
  • 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; 12 performed worse
  • Most accurate: Multi‐Strategy (within 1 basis point), Europe (within 1 bp) and Relative Value (within 6 bps)
  • Most significant misses: Healthcare (2.57% better than expected), Emerging Europe (2.45% better) and Equity Short‐Bias (1.41% worse)
  • Overall, our estimates resulted in a 48% reduction in variance relative to naïve forecasts of flat returns

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