EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: January 18, 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 1.00% last week as equities had yet another rough week
  • Hedge funds are now down 2.26% for the month and year
  • Only three of the 30 hedge fund strategies we track earned positive returns
  • Almost all major asset classes save government bonds fell, as investors once again abandoned high risk assets
  • The majority of our 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’s big loss led to a horrible week for commodities
  • Both developed and emerging currencies depreciated against the US dollar
  • Our current December hedge fund index return projection of ‐0.76% differs from our initial estimate of ‐0.95% by 0.19%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds lost 1.00% last week as equities had yet another rough week
  • Hedge funds are now down 2.26% for the month and year
  • Our factor-attribution analysis suggests positive weekly contributions from multi-asset class momentum (0.05%), commodity momentum (0.05%) and multi-asset class trend following (0.05%)
  • It indicates negative contributions from equity beta (‐0.58%), equity size (‐0.11%) and the spread between developed market equities and US equities (‐0.11%)
  • It estimates weekly and month‐to‐date alphas of 0.01% and 0.35%, respectively

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Global Benchmarks

  • Almost all major asset classes save government bonds fell, as investors once again abandoned high risk assets
  • Leaders: US 10-year Treasuries (0.85%), agricultural commodities (0.67%) and US total market Treasuries (0.64%)
  • Laggards: energy commodities (‐12.31%), oil (-11.28%) and MLPs (‐10.39%)
  • Equities: utilities eked out a small gain, but the remainder of our universe of regional and sector benchmarks declined, most with heavy losses
  • Bonds: developed market government bonds rose worldwide, but corporate bonds fell
  • Real Estate: real estate fell, matching poor equity performance
  • Commodities: oil’s big loss led to a horrible week for commodities
  • Currencies: both developed and emerging currencies depreciated against the US dollar
  • Multi‐asset: bond strength once again 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: 1-year commodity momentum (3.49%), 1-year commodity sector momentum (3.42%) and the spread between developed market real estate securities and small cap equities (3.38%)
  • Laggards: crude oil (‐3.75%), total market commodities (‐3.51%) and the spread between US aggregate bonds and Treasuries (‐3.15%)
  • Commodities: commodity momentum, trend following and term structure strategies profited handsomely as energy futures continued their slide
  • Credit: credit underperformed globally 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 once again as investors bid down longer-dated global yields
  • Foreign Exchange: foreign currencies depreciated against the dollar; carry strategies fell, but momentum and value strategies rose
  • Multi‐Asset Class: all three of our momentum and trend following factors gained value
  • Real Estate: real estate outperformed equities, particularly abroad
  • Risk: our put writing and buy writing indexes fell materially, but several our VIX term structure and short variance strategies profited

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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 22 of 30 strategies
  • We were within 25 basis points for eight indexes and within 50 basis points for 13
  • Both our hit rate and our accuracy were below average
  • Our current December hedge fund index return projection of ‐0.76% differs from our initial estimate of ‐0.95% by 0.19%
  • 24 strategies performed better than we anticipated; six performed worse
  • Most accurate: Multi‐Strategy (within 1 basis point), Relative Value (within 8 bps) and Equity Value (within 14 bps)
  • Most significant misses: Energy (2.90% better than expected), Equity Short-Bias (1.47% worse) and Europe (1.23% better)
  • Overall, our estimates resulted in a 54% reduction in variance relative to naïve forecasts of flat returns

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