EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: December 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.

Highlights

  • We project that hedge funds lost 0.95% in December as negative alpha and poor equity performance wiped out year-to-date returns
  • Hedge funds finished the year up 0.01%
  • Only two of the 30 hedge fund strategies we index posted positive performance; 20 produced negative alpha
  • There were few bright spots in global markets as energy had another disastrous month
  • Equities declined globally, with the worst losses in energy, small caps, MLPs and emerging Europe
  • Developed currencies appreciated relative to the US dollar, while emerging currencies depreciated materially
  • Our broad hedge fund index returned 0.30% in November, 0.30% more than our initial estimate

Global Hedge Fund Performance

  • Our factor‐based estimates project that hedge funds lost 0.95% in December as negative alpha and poor equity performance wiped out year‐to‐date returns
  • Hedge funds finished the year up 0.01%
  • Our factor‐attribution analysis suggests positive contributions from equity size (0.20%), equity sector momentum (0.09%) and the spread between developed market equities and US equities (0.08%)
  • It indicates negative contributions from equity beta (‐0.50%), alpha (‐0.42%) and equity sector beta (‐0.15%)
  • It estimates that hedge funds produced ‐0.05% of alpha for the year

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Strategy Performance

  • Only two of the 30 strategies we track posted positive performance
  • Leaders: Equity Short‐Bias (1.45%), Merger Arbitrage (0.17%) and Healthcare (‐0.09%)
  • Laggards: Energy (‐4.98%), Emerging Europe (‐4.71%) and Latin America (‐2.72%)
  • Equity beta was the most significant source of return for most strategies, although equity sector beta and regional exposures also played significant roles
  • North America funds underperformed Asian and European funds
  • Our models forecast negative alpha in 20 of 30 strategies
  • Alpha leaders: Healthcare (0.91%), Technology (0.57%) and Emerging Asia (0.39%)
  • Alpha laggards: Distressed Securities (‐1.45%), Energy (‐1.31%) and Equity Short‐Bias (‐1.30%)

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Global Benchmarks

  • There were few bright spots in global markets as energy had another disastrous month
  • Leaders: base metals (3.10%), US consumer staples (2.51%) and US utilities (2.00%)
  • Laggards: energy commodities (‐14.77%), oil (‐14.74%) and US energy equities (‐10.60%)
  • Equities: equities declined globally, with the worst losses in energy, small caps, MLPs and emerging Europe
  • Bonds: government and investment grade bonds rose in developed foreign markets, but fell in the US
  • Real Estate: US REITs sidestepped equity losses, finishing the month as one of the best performing asset classes
  • Commodities: base metals rallied, but energy losses were severe
  • Currencies: developed currencies appreciated relative to the US dollar, while emerging currencies depreciated materially
  • Multi‐asset: foreign bond performance was unable to prevent our 60/40 and risk parity benchmarks from posting losses

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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 consumer staples and the broad market (4.83%), commodity term structure (4.77%) and the spread between US REITs and small cap equities (4.27%)
  • Laggards: the spread between US energy equities and the broad market (‐6.25%), US equity size (‐5.51%) and oil futures (‐5.01%)
  • Commodities: oil once again plummeted, benefitting momentum and trend following strategies
  • Credit: credit risk produced strongly negative returns both domestically and abroad
  • Equity: in the US, equity size and value performed even worse than the broad market; momentum strategies were profitable both domestically and in developed markets
  • Fixed Income: developed market government bonds performed well, but most fixed income strategies suffered
  • Foreign Exchange: developed market currencies gained relative to the dollar, but emerging currencies fell significantly
  • Multi‐Asset Class: momentum and trend following strategies profited from market stress
  • Real Estate: REITs were disproportionately profitable in the US
  • Risk: all of our short risk strategies declined, with VIX term structure struggling the most

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November 2015 Estimate Review

  • All of the indexes underlying our composite indexes have reported November returns
  • We correctly predicted the direction of 21 of 30 strategies
  • We were within 25 basis points for 14 indexes and within 50 basis points for 21
  • Our hit rate was below average, but our accuracy was above average due to atypically modest strategy returns
  • Our broad hedge fund index returned 0.30% for the month, 0.30% greater than our initial estimate of 0.00%
  • 17 strategies performed better than we anticipated; 12 performed worse
  • Most accurate: Europe (exact), Multi‐Strategy (within 1 basis point) and Asia (within 4 bps)
  • Most significant misses: Healthcare (2.64% better than expected), Emerging Europe (2.45% better) and Equity Short‐Bias (1.42% worse)
  • Overall, our estimates resulted in a 47% reduction in variance relative to naïve forecasts of flat returns

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