EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: March 7, 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 0.75% last week as equities continued to rally
  • Hedge funds are now up 0.76% for the month and down 2.23% for the year
  • All but four of the 30 hedge fund strategies we track earned positive returns
  • All of our regional, sector and style equity benchmarks posted gains
  • U.S. Treasuries were the only major asset class to decline
  • Credit risk was highly rewarded
  • Commodities, particularly in the energy sector, accumulated large gains
  • Our short volatility and variance factors posted mixed, but muted performance
  • Momentum and trend following strategies displayed weakness in and across most asset classes
  • We will begin analyzing our February hedge fund index projections next week

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds gained 0.75% last week as equities continued to rally
  • Hedge funds are now up 0.76% for the month and down 2.23% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.60%), the spread between developed market equities and U.S. equities (0.25%) and short volatility factors (0.10%)
  • It indicates negative contributions from multi-asset class momentum (-0.10%), equity value (‐0.10%) and multi-asset class trend following (‐0.07%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.04%, -0.02% and -0.79%, respectively

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Strategy Performance

  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (4.71%), Emerging Europe (3.72%) and Energy (3.58%)
  • Laggards: Equity Short-Bias (‐1.31%), Managed Futures (‐1.07%) and Equity Market Neutral (-0.18%)
  • North American hedge funds outperformed both Asian and European funds
  • Equity factors were the dominant sources of return for most strategies
  • Alpha leaders: Equity Short-Bias (0.74%), Emerging Asia (0.09%) and Europe (0.08%)
  • Alpha laggards: Energy (‐0.59%), Latin America (‐0.34%) and Emerging Markets (‐0.29%)

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Global Benchmarks

  • Equities, particularly those in emerging economies, had an exceptionally strong week as risk assets performed very well worldwide
  • Leaders: Latin America equities (13.83%), oil futures (9.59%) and emerging EMEA equities (8.24%)
  • Laggards: 10-year U.S. Treasuries (‐1.03%), 5-year U.S. Treasuries (-0.67%) and U.S. Treasuries (-0.55%)
  • Equities: every one of our regional, sector and style benchmarks posted gains
  • Bonds: U.S. Treasuries displayed weakness, but foreign government bonds rose due largely to currency appreciation
  • Real Estate: real estate followed equities upward
  • Commodities: energy commodities soared for the second consecutive week; other commodity sectors also rose
  • Currencies: both developed and emerging currencies gained relative to the U.S. dollar
  • Multi‐asset: risk parity strategies trailed 60/40 due to bond underperformance; global indexes materially outperformed U.S. 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 Latin America equities and emerging market equities (5.45%), developed market equity value (5.34%) and emerging market equity value (4.83%)
  • Laggards: 1-year developed market equity sector momentum (‐4.64%), 1-year U.S. equity momentum (‐4.40%) and the spread between developed market real estate and small cap equities (‐4.20%)
  • Commodities: beta factors rallied, but medium term momentum and trend following strategies suffered
  • Credit: credit risk was once again highly rewarded as investment grade and high yield credit spreads tightened
  • Equity: size and value factors displayed strong performance, while momentum and trend following factors posted material losses
  • Fixed Income: term structure strategies struggled, but non-Treasury spreads notched gains
  • Foreign Exchange: emerging currencies and carry strategies outperformed, while momentum and value strategies suffered
  • Multi‐Asset Class: all three of our momentum and trend following factors declined
  • Real Estate: real estate underperformed equities both domestically and abroad, but the losses were particularly large overseas
  • Risk: short implied volatility factors gained, but short realized variance factors declined

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February 2016 Estimate Review

We will begin analyzing our February hedge fund index return estimates next week once more of the indexes underlying our composite indexes have reported returns.

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