EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: February 29, 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 0.43% last week as rising equities once again bolstered returns
  • Hedge funds are now down 0.16% for the month and 2.12% for the year
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Almost all of our U.S. equity benchmarks posted gains, but foreign benchmarks did not fare as well
  • High yield and emerging bonds rallied along with equities for the second straight week
  • Commodities were among the top movers, as energy products rallied while base metals and agricultural commodities fell
  • Most of our U.S. short volatility and variance factors notched gains
  • Momentum and trend following strategies tended to struggle once again
  • Our current January hedge fund index return projection of ‐1.96% differs from our initial estimate of ‐2.18% by 0.22%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds gained 0.43% last week as rising equities once again bolstered returns
  • Hedge funds are now down 0.16% for the month and 2.12% for the year
  • Our factor-attribution analysis suggests positive weekly contributions from equity beta (0.36%), equity sector beta (0.08%) and alpha (0.08%)
  • It indicates negative contributions from the spread between developed market equities and U.S. equities (-0.23%), equity country momentum (‐0.03%) and currency momentum (‐0.02%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.08%, -0.09% and 0.24%, respectively

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (1.27%), Equity Long Only (1.12%) and Healthcare (1.08%)
  • Laggards: Equity Short-Bias (‐0.93%), Commodities (‐0.17%) and Emerging Asia (0.04%)
  • North American hedge funds outperformed both Asian and European funds
  • Equity beta and the spread between developed market equities and U.S. equities were the most significant factors driving returns across strategies
  • Alpha leaders: Managed Futures (0.48%), Emerging Asia (0.38%) and Equity Short-Bias (0.34%)
  • Alpha laggards: Convertible Arbitrage (‐0.14%), Emerging Europe (‐0.09%) and Fixed Income Arbitrage (‐0.07%)

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Global Benchmarks

  • The U.S. equity rebound extended into a second week as investors continued to embrace riskier securities
  • Leaders: energy commodities (3.98%), U.S. MLPs (3.85%) and oil futures (3.25%)
  • Laggards: precious metals (‐1.44%), agricultural commodities (-0.85%) and gold futures (-0.84%)
  • Equities: almost all of our U.S. equity benchmarks posted gains, led by MLPs which rose sharply for the second straight week; foreign equity benchmarks did not share in the gains
  • Bonds: government and investment grade bonds displayed weakness, but high yield and emerging market bonds followed equities upward
  • Real Estate: real estate gained along with equities in the U.S., but lagged internationally
  • Commodities: energy commodities soared while precious metals and agricultural commodities fell
  • Currencies: both developed and emerging currencies depreciated relative to the U.S. dollar
  • Multi‐asset: risk parity strategies trailed 60/40 due to poor relative bond performance; U.S. indexes materially outperformed global indexes

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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. 10-year inflation-linked bonds and 10-year Treasuries (3.09%), the spread between U.S. inflation-linked bonds and Treasuries (2.65%) and equity size (2.50%)
  • Laggards: 1-month commodity momentum (‐2.45%), 1-month commodity sector momentum (‐2.06%) and 1-year commodity sector momentum (‐2.05%)
  • Commodities: oil futures rose, but momentum, trend following and term structure strategies struggled
  • Credit: credit risk was again highly rewarded as investment grade and high yield credit spreads tightened
  • Equity: equity beta, equity size, and our MLP-REIT spread rallied once again, while momentum and trend following strategies fared poorly
  • Fixed Income: U.S. inflation-linked bonds had a very strong week relative to U.S. Treasuries
  • Foreign Exchange: currency carry posted strong returns, while momentum strategies lagged
  • Multi‐Asset Class: short-term momentum and trend following strategies suffered modest declines
  • Real Estate: real estate underperformed equities both domestically and abroad
  • Risk: almost all of our U.S.-focused short volatility and variance strategies notched gains, led by put writing

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January 2016 Estimate Review

  • All of the indexes underlying our composite indexes have reported January returns, but until the end of the month our analysis is preliminary and subject to change
  • As currently stands, we correctly predicted the direction of 29 of 30 strategies
  • We were within 25 basis points for nine indexes and within 50 basis points for 18
  • Our hit rate and accuracy were both above average
  • Our current January hedge fund index return projection of ‐1.96% differs from our initial estimate of ‐2.18% by 0.22%
  • 12 strategies performed better than we anticipated; 18 performed worse
  • Most accurate: Global Macro (with 1 basis point), Credit (within 7 bps) and North America (within 12 bps)
  • Most significant misses: Emerging Asia (4.46% worse than expected), Equity Short-Bias (3.52% better) and Healthcare (2.80% worse)
  • Overall, our estimates resulted in an 88% reduction in variance relative to naïve forecasts of flat returns

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