EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: January 2016

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 2.18% in January as plummeting equities crippled returns
  • Only three of the 30 strategies we track posted positive returns
  • Energy commodities and equities had a horrible start to the year as investors fled risky assets for the safety of U.S. Treasuries
  • Equities fell in every major region, but a few defensive sectors managed to profit
  • Government bonds served as safe havens in both the U.S. and Europe
  • Credit risk produced strongly negative returns both domestically and abroad
  • Gold and other precious metals rallied, but most commodities were down as oil racked up a sizeable loss
  • Both developed and emerging market currencies depreciated materially relative to the U.S. dollar
  • Our broad hedge fund index returned -0.87% in December, 0.08% more than our initial estimate of -0.95%

Global Hedge Fund Performance

  • Our factor‐based estimates project that hedge funds lost 2.18% in January as plummeting equities crippled returns
  • Our factor‐attribution analysis suggests positive contributions from alpha (0.36%) and developed currency exposure (0.05%)
  • It indicates negative contributions from equity beta (‐1.40%), equity sector beta (‐0.32%) and the spread between developed market equities and U.S. equities (‐0.23%)

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Strategy Performance

  • Only three of the 30 strategies we track posted positive returns
  • Leaders: Managed Futures (2.75%), Equity Short‐Bias (2.22%) and Commodities (0.52%)
  • Laggards: Equity Long Only (‐5.48%), Healthcare (‐5.46%) and Equity Growth (‐4.96%)
  • Equity beta was easily the most significant source of return for most strategies, although equity sector beta also played a significant role
  • North American funds outperformed Asian funds, but underperformed European funds
  • Our models forecast positive alpha in 15 of 30 strategies
  • Alpha leaders: Managed Futures (2.04%), Global Macro (0.97%) and Commodities (0.64%)
  • Alpha laggards: Equity Short‐Bias (‐1.78%), Emerging Europe (‐1.72%) and Latin America (‐0.80%)

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Global Benchmarks

  • Energy commodities and equities had a horrible start to the year as investors fled risky assets for the safety of U.S. Treasuries
  • Leaders: gold (5.29%), precious metals (4.94%) and U.S. utilities (4.81%)
  • Laggards: oil (‐12.12%), U.S. MLPs (‐11.78%) and U.S. materials (‐10.30%)
  • Equities: equities fell in every major region, but a few defensive sectors managed to post gains
  • Bonds: U.S. Treasuries, particularly at longer durations, benefited from a flight to quality
  • Real Estate: real estate securities globally joined in equity losses
  • Commodities: gold and other precious metals rallied, but most commodities were down as oil racked up a sizeable loss
  • Currencies: both developed and emerging market currencies fell materially relative to the U.S. dollar
  • Multi‐asset: risk parity strategies outperformed 60/40, with our U.S. risk parity benchmark actually gaining due to the strong risk-adjusted performance of U.S. Treasury bonds

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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 broad U.S. equities (8.76%), the spread between developed ex-U.S. real estate securities and small cap equities (7.42%) and the spread between U.S. utility stocks and broad U.S. equities (7.30%)
  • Laggards: the spread 5-year investment grade bonds and 5-year U.S. Treasuries (‐6.25%), the spread between U.S. aggregate bonds and U.S. Treasuries (‐6.21%) and the spread between 10-year investment grade bonds and 10-year U.S. Treasuries (‐6.16%)
  • Commodities: oil once again plummeted, helping momentum and trend following strategies
  • Credit: credit risk produced strongly negative returns both domestically and abroad
  • Equity: equities suffered globally and MLPs woefully underperformed REITs, but investors betting on telecom and utility stocks profited
  • Fixed Income: government bonds served as safe havens as both U.S. and European term structure strategies notched healthy gains
  • Foreign Exchange: foreign currencies depreciated relative to the dollar and carry trades suffered, but value strategies rose
  • Multi‐Asset Class: momentum and trend following strategies gained amid the market stress
  • Real Estate: although real estate securities lost value globally, they materially outperformed equities
  • Risk: all of our short risk strategies declined as volatility spiked globally

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December 2015 Estimate Review

  • All of the indexes underlying our composite indexes have reported December returns
  • We correctly predicted the direction of 24 of 30 strategies
  • We were within 25 basis points for seven indexes and within 50 basis points for 14
  • Both our hit rate and our accuracy were below average
  • Our broad hedge fund index returned -0.87% in December, 0.08% more than our initial estimate of -0.95%
  • 25 strategies performed better than we anticipated; five performed worse
  • Most accurate: Multi‐Strategy (within 3 basis points), Equity Value (within 5 bps) and Equity Short-Bias (within 7 bps)
  • Most significant misses: Energy (2.90% better than expected), Emerging Europe (2.13% better) and Equity Growth (1.57% better)
  • Overall, our estimates resulted in a 36% 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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