EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: February 1, 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 0.04% last week as equities rallied but other factor exposures suppressed gains
  • Hedge funds are now down 2.26% for the month and year
  • 18 of the 30 hedge fund strategies we track earned positive returns
  • Every major asset class, and nearly every sub-index gained value as all but three of our 54 global benchmark indexes rose
  • Equities were up globally, and in all sectors except healthcare
  • Investment grade bonds underperformed Treasuries, but high yield spreads and term structure strategies profited
  • Momentum and trend following strategies lost value in most asset classes as markets reversed their recent trends
  • 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 0.04% last week as equities rallied but other factor exposures suppressed gains
  • Hedge funds are now down 2.26% for the month and year
  • Our factor-attribution analysis suggests positive weekly contributions from equity beta (0.41%), the spread between emerging market and developed market equities (0.13%) and commodity beta (0.03%)
  • It indicates negative contributions from equity value (‐0.18%), alpha (‐0.06%) and equity sector beta (‐0.06%)
  • It estimates month‐to‐date alpha of 0.18%

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Global Benchmarks

  • Every major asset class, and nearly every sub-index gained value as all but three of our 54 global benchmark indexes rose
  • Leaders: emerging EMEA equities (8.45%), Latin American equities (7.03%) and energy commodities (6.51%)
  • Laggards: U.S. healthcare equities (‐2.10%), agricultural commodities (-0.95%) and cash (0.00%)
  • Equities: equities were up globally, and in all sectors except healthcare
  • Bonds: each of our bond benchmarks gained, with riskier bonds leading the way
  • Real Estate: real estate performed strongly overseas, but posted comparatively modest returns in the U.S.
  • Commodities: energy commodities realized large profits, but agricultural commodities fell
  • Currencies: emerging currencies rallied against the U.S. dollar
  • Multi‐asset: risk parity strategies handily outperformed 60/40 as U.S. bonds notched strong risk-adjusted returns

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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: U.S. equity value (4.24%), the spread between emerging market and developed market equities (3.77%) and European government bond term structure (2.88%)
  • Laggards: the spread between U.S. healthcare equities and the broad market (‐3.89%), emerging market equity country trend following (‐3.03%) and 1-year commodity sector momentum (‐2.92%)
  • Commodities: momentum and trend following strategies declined significantly as commodities reversed their downward trend
  • Credit: investment grade bonds underperformed Treasuries, but high yield spreads and term structure strategies profited
  • Equity: several sectors considerably outperformed the broad market while most momentum and trend following strategies suffered
  • Fixed Income: government bonds worldwide posted strong risk-adjusted returns
  • Foreign Exchange: carry and emerging market currencies gained once again, but momentum and value strategies fell
  • Multi‐Asset Class: all three of our momentum and trend following factors lost value
  • Real Estate: real estate tended to underperform equities worldwide
  • Risk: short volatility strategies profited, but term structure and short variance strategies declined

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December 2015 Estimate Review

  • All of the indexes underlying our composite indexes have reported December returns, but the returns and our analysis are still 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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