EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: January 25, 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 gained 0.09% last week as equities trimmed their month-to-date losses
  • Hedge funds are now down 2.05% for the month and year
  • 14 of the 30 hedge fund strategies we track earned positive returns
  • Equities, commodities and other volatile assets rose as investors became more risk tolerant
  • Most bond indexes were down modestly, but high yield and emerging market bonds scraped out minor gains
  • Developed currencies depreciated against the U.S. dollar while emerging currencies appreciated
  • Momentum strategies struggled in several asset classes as numerous securities partially reversed their large month-to-date moves
  • Our current December hedge fund index return projection of ‐0.69% differs from our initial estimate of ‐0.95% by 0.26%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds gained 0.09% last week as equities trimmed their month-to-date losses
  • Hedge funds are now down 2.05% for the month and year
  • Our factor-attribution analysis suggests positive weekly contributions from equity beta (0.32%), equity value (0.06%) and short volatility (0.06%)
  • It indicates negative contributions from the spread between developed market and U.S. equities (‐0.14%), equity size (‐0.12%) and currency momentum (‐0.04%)
  • It estimates weekly and month‐to‐date alphas of 0.02% and 0.49%, respectively

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Global Benchmarks

  • Energy commodities and equities rose as investors bid up riskier assets
  • Leaders: energy commodities (6.47%), oil (5.93%) and U.S. telecom (0.64%)
  • Laggards: developed Asia-Pacific equities (‐2.05%), global ex-U.S. real estate (-0.91%) and developed ex-U.S. government bonds (‐0.71%)
  • Equities: equities were generally up worldwide, declining only in Asia and Latin America
  • Bonds: most bond indexes were down modestly, but high yield and emerging market bonds scraped out minor gains
  • Real Estate: U.S. REITs rose, but real estate fell abroad
  • Commodities: energy commodities lifted our broad commodity index to a healthy gain
  • Currencies: developed currencies depreciated against the U.S. dollar while emerging currencies appreciated
  • Multi‐asset: 60/40 outperformed risk parity as bonds trailed equities

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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 U.S. telecom stocks and U.S. equities (2.09%), total market commodities (1.97%) and crude oil (1.97%)
  • Laggards: the spread between developed Asia-Pacific equities and developed equities (‐2.57%), developed equity size (‐2.28%) and developed country 1-month momentum (‐2.19%)
  • Commodities: momentum strategies declined as commodities reversed their downward trend
  • Credit: even though equities rose, credit once again underperformed
  • Equity: most of our spread factors trailed broad U.S. beta; momentum and trend following strategies lagged
  • Fixed Income: emerging market bonds rose relative to U.S. Treasuries, but most fixed income factors declined
  • Foreign Exchange: carry and emerging market currencies gained, but momentum and value strategies fell along with developed currencies
  • Multi‐Asset Class: all three of our momentum and trend following factors lost value
  • Real Estate: real estate tended to underperform equities worldwide
  • Risk: most short volatility and variance factors posted gains

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December 2015 Estimate Review

  • All of the indexes underlying our composite indexes have reported December returns, but the returns are 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 five indexes and within 50 basis points for 11
  • Both our hit rate and our accuracy were below average
  • Our current December hedge fund index return projection of ‐0.69% differs from our initial estimate of ‐0.95% by 0.26%
  • 23 strategies performed better than we anticipated; seven performed worse
  • Most accurate: Multi‐Strategy (within 1 basis point), Equity Value (within 5 bps) and Relative Value (within 11 bps)
  • Most significant misses: Energy (2.90% better than expected), Emerging Europe (2.13% better) and Equity Short-Bias (1.82% worse)
  • Overall, our estimates resulted in a 15% reduction in variance relative to naïve forecasts of flat returns
  • It appears that hedge funds aggressively cut their risk in December, losing less from market declines than our models predicted

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