EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: March 14, 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 0.22% last week as rising equities again lifted returns
  • Hedge funds are now up 0.93% for the month and down 1.04% for the year
  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Other than MLPs, every one of our equity region, sector and style benchmarks posted gains
  • U.S. Treasuries were the worst performing major asset class on a risk-adjusted basis
  • Credit risk was again highly rewarded
  • Energy commodities soared for the third consecutive week, but base and precious metals were among our worst performing benchmarks
  • All of our short volatility and variance factors produced positive returns
  • Momentum and trend following strategies again struggled
  • We currently estimate that hedge funds returned 0.06% in February, 0.16% more than our initial estimate of ‐0.10%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds gained 0.22% last week as rising equities again lifted returns
  • Hedge funds are now up 0.93% for the month and down 1.04% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.22%), oil futures (0.05%) and short volatility factors (0.05%)
  • It indicates negative contributions from equity size (-0.06%), commodity momentum (‐0.05%) and multi-asset class momentum (‐0.04%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.00%, -0.08% and 0.19%, respectively

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Strategy Performance

  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (1.57%), Latin America (0.84%) and Healthcare (0.72%)
  • Laggards: Managed Futures (‐1.07%), Equity Short-Bias (‐0.87%) and Global Macro (-0.28%)
  • North American hedge funds outperformed both Asian and European funds
  • Factor returns were relatively muted, but equity beta provided the largest contribution to strategy performance
  • Alpha leaders: Technology (0.29%), Special Situations (0.23%) and Equity Value (0.22%)
  • Alpha laggards: Managed Futures (‐0.53%), Equity Short-Bias (‐0.31%) and Global Macro (‐0.12%)

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Global Benchmarks

  • Equities and energy commodities again benefited from worldwide increases in risk tolerance
  • Leaders: oil futures (6.65%), energy commodities (6.19%) and commodities (2.88%)
  • Laggards: base metals (‐1.80%), U.S. MLPs (-1.42%) and gold futures (-0.87%)
  • Equities: other than MLPs, every one of our regional, sector and style benchmarks posted gains
  • Bonds: U.S. Treasuries displayed weakness while foreign government bonds rose for the second consecutive week
  • Real Estate: real estate rose along with equities
  • Commodities: energy commodities soared for the third consecutive week, but base and precious metals were among our worst performing benchmarks
  • Currencies: both developed and emerging currencies appreciated modestly relative to the U.S. dollar
  • Multi‐asset: risk parity strategies trailed 60/40 in the U.S., but outperformed abroad; global indexes materially outperformed U.S. indexes due to strong international bond performance

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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 global and U.S. inflation-linked securities (2.82%), the U.S. investment grade credit spread (2.71%) and the spread between U.S. aggregate bonds and U.S. Treasuries (2.57%)
  • Laggards: commodity term structure (‐3.87%), the spread between emerging market and developed market high yield credit (‐2.76%) and 1-month commodity sector momentum (‐2.75%)
  • Commodities: oil rose, but other commodity betas fell, as did momentum, trend following and term structure strategies
  • Credit: investment grade and high yield credit spreads continued to produce positive returns
  • Equity: beta was the main source of equity returns, but equity value was also well rewarded
  • Fixed Income: U.S. government term structure strategies displayed weakness, but foreign and non-government U.S. bond spreads performed well
  • Foreign Exchange: developed and emerging currencies rose relative to the dollar, but factor performance was otherwise muted
  • Multi‐Asset Class: all three of our momentum and trend following factors declined
  • Real Estate: real estate outperformed equities in the U.S., but underperformed equities overseas
  • Risk: all of our short volatility and variance factors produced gains

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February 2016 Estimate Review

  • Many of the indexes underlying our composite indexes have not yet reported February returns, so our analysis is preliminary and subject to change
  • As currently stands, we correctly predicted the direction of 22 of 30 strategies
  • We were within 25 basis points for 12 indexes and within 50 basis points for 21
  • Our hit rate was below average but our accuracy was above average
  • We currently estimate that hedge funds returned 0.06% in February, 0.16% more than our initial estimate of ‐0.10%
  • 15 strategies performed better than we anticipated; 14 performed worse
  • Most accurate: Global Macro (exact), Equity Long Only (within 2 basis points) and Event Driven (within 2 bps)
  • Most significant misses: Healthcare (2.01% worse than expected), Latin America (1.86% better) and Emerging Europe (1.19% better)
  • Overall, our estimates resulted in a 66% reduction in variance relative to naïve forecasts of flat returns

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