EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: February 15, 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 0.92% last week amid continued equity declines
  • Hedge funds are now down 3.34% for the year
  • Only three of the 30 hedge fund strategies we track earned positive returns
  • Of our equity Global Benchmarks, only U.S. Consumer Staples gained
  • Government bonds performed well both domestically and abroad, but corporate securities lagged
  • Precious metals soared, but oil and other commodities fell once again
  • Foreign exchange momentum and value strategies profited, while carry declined
  • Momentum and trend following strategies tended to produce outsized profits regardless of asset class
  • Our current January hedge fund index return projection of ‐1.83% differs from our initial estimate of ‐2.18% by 0.35%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds lost 0.92% last week amid continued equity declines
  • Hedge funds are now down 3.34% for the year
  • Our factor-attribution analysis suggests positive weekly contributions from alpha (0.13%), gold (0.07%) and the spread between emerging market and developed market equities (0.06%)
  • It indicates negative contributions from the spread between developed market equities and U.S. equities (-0.62%), equity beta (‐0.22%) and the spread between listed private equities and U.S. equities (‐0.10%)
  • It estimates weekly, month-to-date, and year-to-date alpha of 0.13%, 0.17% and 0.89%, respectively

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Global Benchmarks

  • Gold and government bonds profited as riskier assets declined worldwide
  • Leaders: gold (7.06%), precious metals (7.03%) and developed ex-U.S. government bonds (1.23%)
  • Laggards: U.S. MLPs (‐10.45%), developed Asia-Pacific equities (-7.32%) and developed ex-U.S. equities (-4.72%)
  • Equities: of our equity benchmarks, only U.S. Consumer Staples gained; foreign equities and MLPs experienced particularly strong losses
  • Bonds: government bonds performed well both domestically and abroad, but corporate securities lagged
  • Real Estate: real estate declined globally
  • Commodities: precious metals soared, but oil and other commodities fell once again
  • Currencies: developed currencies appreciated relative to the U.S. dollar, but emerging currencies depreciated
  • Multi‐asset: risk parity strategies declined only modestly, but 60/40 strategies suffered greater losses

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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 market real estate and small cap equities (4.85%), 1-month multi-asset class momentum (4.34%) and the spread between developed market real estate and developed market equities (4.20%)
  • Laggards: the spread between developed market equities and U.S. equities (‐4.19%), the spread between developed market and U.S. equity indexes (‐3.24%) and the spread between aggregate U.S. bonds and U.S. Treasuries (‐3.13%)
  • Commodities: gold had a very strong week, as did short-term momentum and term structure strategies
  • Credit: corporate bonds again trailed government bonds as credit spreads widened further
  • Equity: momentum and trend following strategies gained while foreign equity spreads and equity size and value factors struggled
  • Fixed Income: U.S. Treasuries gained, benefiting from their safe haven status
  • Foreign Exchange: momentum and value strategies profited, while carry declined
  • Multi‐Asset Class: all three of our momentum and trend following factors produced profits, with our short-term momentum factor displaying exceptionally strong performance
  • Real Estate: real estate securities underperformed equities domestically, but outperformed abroad
  • Risk: our tail risk strategies produced mixed performance

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January 2016 Estimate Review

  • Many of the indexes underlying our composite indexes have not yet reported January returns, so our analysis is preliminary and subject to change
  • As currently stands, we correctly predicted the direction of 27 of 30 strategies
  • We were within 25 basis points for 14 indexes and within 50 basis points for 20
  • Our hit rate was about average but our accuracy was above average
  • Our current January hedge fund index return projection of ‐1.83% differs from our initial estimate of ‐2.18% by 0.35%
  • 17 strategies performed better than we anticipated; 12 performed worse
  • Most accurate: Relative Value (exact), Equity Long Only (within 3 basis points) and Equity Long/Short (within 6 bps)
  • Most significant misses: Energy (3.47% better than expected), Healthcare (2.31% worse) and Technology (2.13% worse)
  • Overall, our estimates resulted in a 91% reduction in variance relative to naïve forecasts of flat returns

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