EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: February 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 0.10% in February amid mixed factor performance
  • 13 of the 30 strategies we track posted positive returns
  • Macro strategies, including Managed Futures, were the best performers, while Asia-focused strategies suffered
  • Gold continued its torrid start to the year, fueled in part by a dollar decline, which also helped foreign bonds
  • Equities were flat in the U.S. and down in developed markets
  • Government bonds fared well both domestically and abroad
  • Credit risk generated losses in most markets
  • Risk parity strategies outperformed 60/40, with the international risk parity strategy benefiting from its levered foreign currency exposure
  • Our broad hedge fund index returned -1.99% in January, 0.19% more than our initial estimate of -2.18%

Global Hedge Fund Performance

  • Our factor‐based estimates project that hedge funds lost 0.10% in February amid mixed factor performance
  • Hedge funds are now down 2.08% for the year
  • Our factor‐attribution analysis suggests positive contributions from equity sector beta (0.22%), equity size (0.16%) and gold (0.04%)
  • It indicates negative contributions from the spread between developed market equities and U.S. equities (‐0.18%), liquidity factors (‐0.09%) and alpha (‐0.08%)
  • It estimates that hedge funds have produced 0.13% of alpha year-to-date

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Strategy Performance

  • 13 of the 30 strategies we track posted positive returns
  • Leaders: Managed Futures (1.59%), Energy (0.99%) and Global Macro (0.79%)
  • Laggards: Emerging Asia (‐1.98%), Asia (‐1.75%) and Technology (‐1.10%)
  • Equity beta negatively influenced most strategies
  • Factor contributions were generally modest and varied, however, with no single factor dominating the others
  • North American funds trailed European funds very slightly, and both significantly outperformed Asian funds
  • Our models forecast positive alpha in 17 of 30 strategies
  • Alpha leaders: Managed Futures (1.32%), Convertible Arbitrage (0.67%) and Global Macro (0.66%)
  • Alpha laggards: Asia (‐0.58%), Equity Growth (‐0.55%) and Emerging Asia (‐0.52%)

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Global Benchmarks

  • Gold continued its torrid start to the year, fueled in part by a dollar decline, which also helped foreign bonds
  • Leaders: gold futures (10.60%), precious metals (9.59%) and U.S. materials (7.06%)
  • Laggards: oil futures (‐6.44%), energy commodities (‐4.78%) and agricultural commodities (‐2.74%)
  • Equities: equities were flat in the U.S. and down in developed markets; the U.S. materials sector and Latin American equities had particularly strong months, however
  • Bonds: government bonds fared well both domestically and abroad with foreign investments benefiting from a falling dollar
  • Real Estate: Real estate securities fell in the U.S., but rose internationally
  • Commodities: gold extended its gains from January, while oil extended its losses
  • Currencies: developed currencies appreciated strongly relative to the U.S. dollar
  • Multi‐asset: risk parity strategies substantially outperformed 60/40, with the global version posting sizeable gains due largely to its levered currency 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 U.S. materials stocks and broad U.S. equities (7.03%), emerging equity value (6.98%) and gold futures (6.13%)
  • Laggards: 1-year U.S. equity momentum (‐4.24%), 1-year emerging equity sector momentum (‐4.04%) and 1-year developed equity sector momentum (‐3.37%)
  • Commodities: commodities were down as a group, but gold and term structure strategies posted strong returns
  • Credit: credit risk generated losses in most markets
  • Equity: size and value factors tended to perform well, while momentum strategies struggled
  • Fixed Income: government bonds gained both domestically and in foreign developed markets
  • Foreign Exchange: the dollar declined significantly relative to developed market currencies, while currency value strategies posted even larger gains
  • Multi‐Asset Class: short-term momentum had a very strong month, but our medium frequency factors produced only modest returns
  • Real Estate: real estate returns were weak relative to equities, both in the U.S. and abroad
  • Risk: short realized variance strategies were generally rewarded, while short implied volatility strategies were not

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January 2016 Estimate Review

  • All of the indexes underlying our composite indexes have reported January returns
  • We correctly predicted the direction of 29 of 30 strategies
  • We were within 25 basis points for five indexes and within 50 basis points for 18
  • Both our hit rate and our accuracy were above average
  • Our broad hedge fund index returned -1.99% in January, 0.19% more than our initial estimate of -2.18%
  • 11 strategies performed better than we anticipated; 18 performed worse
  • Most accurate: Global Macro (exact), Credit (within 7 bps) and Fund of Funds (within 12 bps)
  • Most significant misses: Emerging Asia (4.46% worse than expected), Equity Short-Bias (3.52% better) and Healthcare (3.17% better)
  • Overall, our estimates resulted in an 88% reduction in variance relative to naïve forecasts of flat returns

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