EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: February 22, 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 model projects that hedge funds gained 0.86% last week as rising equities bolstered returns
  • Hedge funds are now down 0.26% for the month and 2.15% for the year
  • All but three of the 30 hedge fund strategies we track earned positive returns
  • All of our equity Global Benchmarks posted gains, led by MLPs
  • High yield and emerging bonds rallied along with equities
  • Despite strong returns to base metals, commodities continued to fall
  • All of our short volatility and variance factors profited
  • Momentum and trend following strategies struggled as most markets rebounded from recent losses
  • Our current January hedge fund index return projection of ‐1.90% differs from our initial estimate of ‐2.18% by 0.28%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds gained 0.86% last week as rising equities bolstered returns
  • Hedge funds are now down 0.26% for the month and 2.15% for the year
  • Our factor-attribution analysis suggests positive weekly contributions from equity beta (0.71%), the spread between developed market equities and U.S. equities (0.26%) and the spread between high yield and investment grade bonds (0.08%)
  • It indicates negative contributions from alpha (-0.26%), multi-asset class trend following (‐0.07%) and currency momentum (‐0.05%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.26%, 0.26% and 0.67%, respectively

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Global Benchmarks

  • Equities rallied worldwide as investors embraced riskier securities
  • Leaders: U.S. MLPs (10.81%), developed Asia-Pacific equities (6.68%) and global ex-U.S. real estate (5.48%)
  • Laggards: energy commodities (‐1.94%), precious metals (-1.01%) and gold (-0.69%)
  • Equities: all of our equity benchmarks posted gains, led by MLPs which rebounded strongly even in the face of continued declines in oil prices
  • Bonds: government bonds were down modestly, but high yield and emerging bonds rallied along with equities
  • Real Estate: real estate surged globally, outpacing most equity sectors
  • Commodities: base metals rose, but losses from energy and precious metals pushed the broad index down for the week
  • Currencies: developed currencies depreciated relative to the U.S. dollar, but emerging currencies appreciated
  • Multi‐asset: 60/40 and risk parity strategies posted gains, but 60/40 outperformed due to heavier equity exposure

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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 Asia-Pacific equities and developed market equities (2.25%), the spread between U.S. MLPs and REITs (2.19%) and the spread between emerging market high yield and investment grade bonds (2.15%)
  • Laggards: developed market equity index country trend following (‐2.59%), the spread between developed Europe equities and developed market equities (‐2.25%) and the spread between developed market real estate and U.S. real estate (‐2.12%)
  • Commodities: short-term momentum and term structure strategies posted healthy returns
  • Credit: credit risk was highly rewarded as investment grade and high yield credit spreads tightened
  • Equity: equity beta, equity size, and our MLP-REIT spread rallied, but momentum and trend following strategies fared poorly
  • Fixed Income: returns to most fixed income strategies were modest
  • Foreign Exchange: momentum declined and carry rose
  • Multi‐Asset Class: all three of our momentum and trend following factors fell, with our short-term momentum factor losing the most
  • Real Estate: real estate securities outperformed equities domestically, but underperformed in other developed markets
  • Risk: all of our tail risk strategies posted profits, with most strategies producing very strong risk-adjusted returns

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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 all 30 strategies
  • We were within 25 basis points for 10 indexes and within 50 basis points for 21
  • Our hit rate and accuracy were both above average
  • Our current January hedge fund index return projection of ‐1.90% differs from our initial estimate of ‐2.18% by 0.28%
  • 11 strategies performed better than we anticipated; 19 performed worse
  • Most accurate: Credit (with 3 basis points), Latin America (within 5 bps) and Global Macro (within 6 bps)
  • Most significant misses: Equity Short-Bias (2.86% better than expected), Emerging Asia (2.76% worse) and Healthcare (2.20% worse)
  • Overall, our estimates resulted in a 92% reduction in variance relative to naïve forecasts of flat returns

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