EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: January 11, 2016

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 1.21% last week as equities plummeted globally
  • Hedge funds are now down 1.19% for the month and year
  • Only four of the 30 hedge fund strategies we track earned positive returns
  • Bonds and gold rallied as investors sought shelter from declining risky assets
  • Our entire universe of regional and sector equity benchmarks declined, most with heavy losses
  • Real estate outperformed equities, particularly overseas, but still could not escape losses
  • Oil plummeted once again
  • Emerging currencies depreciated relative to the US dollar, and carry strategies suffered
  • Our current December hedge fund index return projection of ‐0.78% differs from our initial estimate of ‐0.95% by 0.17%, a slightly smaller difference than normal

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds lost 1.21% last week as equities plummeted globally
  • Hedge funds are now down 1.19% for the month and year
  • Our factor-attribution analysis suggests positive weekly contributions from alpha (0.41%), equity size (0.13%) and equity country momentum (0.06%)
  • It indicates negative contributions from equity beta (‐1.53%), short volatility (‐0.15%) and equity sector beta (‐0.13%)
  • It estimates weekly and month‐to‐date alphas of 0.41% and 0.43%, respectively

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Global Benchmarks

  • Bonds and gold rallied as investors sought shelter from declining equities, real estate and commodities
  • Leaders: gold (3.56%), precious metals (3.11%) and US 10‐year Treasuries (1.41%)
  • Laggards: oil (‐10.47%), energy commodities (‐8.30%) and Latin America (‐8.21%)
  • Equities: our entire universe of regional and sector benchmarks declined, most with heavy losses
  • Bonds: government and investment grade bonds rose worldwide as investors fled risky assets
  • Real Estate: real estate outperformed equities, but could not escape losses
  • Commodities: oil was once again hammered; precious metals was the only sector to profit
  • Currencies: emerging currencies depreciated significantly relative to the US dollar
  • Multi‐asset: bond strength helped risk parity strategies outperform 60/40, but all four of our multi‐asset class benchmarks 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: the spread between developed real estate and broad equities (5.73%), the spread between developed real estate and small cap equities (4.99%) and emerging markets equity country index trend following (4.23%)
  • Laggards: US total market equity (‐3.99%), short VIX short‐term futures (‐3.85%) and short global capped variance (‐3.72%)
  • Commodities: commodity beta suffered, but momentum, term structure and trend following strategies profited
  • Credit: credit underperformed as investors moved towards less risky assets
  • Equity: beta declined significantly, while defensive sector spreads, momentum, and trend following strategies rose
  • Fixed Income: term structure strategies gained as investors bid down global yields
  • Foreign Exchange: emerging currencies depreciated materially; carry strategies fell, but momentum and value strategies rose
  • Multi‐Asset Class: all three of our momentum and trend following factors added value
  • Real Estate: real estate handily outperformed equities, particularly abroad
  • Risk: each of our short risk strategies fell, with put writing realizing the largest loss

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December 2015 Estimate Review

  • Many of the indexes underlying our composite indexes have not yet reported December returns, so our analysis is preliminary and subject to change
  • As currently stands, we correctly predicted the direction of 25 of 30 strategies
  • We were within 25 basis points for 10 indexes and within 50 basis points for 17
  • Both our hit rate and our accuracy were about average
  • Our current December hedge fund index return projection of ‐0.78% differs from our initial estimate of ‐0.95% by 0.17%, a slightly smaller difference than normal
  • 23 strategies performed better than we anticipated; seven performed worse
  • Most accurate: Multi‐Strategy (within 8 basis points), Emerging Markets (within 9 bps) and Equity Value (within 11 bps)
  • Most significant misses: Energy (3.14% better than expected), Commodities (1.82% better) and Europe (1.23% better)
  • Overall, our estimates resulted in a 55% reduction in variance relative to naïve forecasts of flat returns

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