EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: March 21, 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 added 0.41% last week as gains from equities again fueled returns
  • Hedge funds are now up 1.29% for the month and down 0.93% for the year
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • It was almost impossible for a well-diversified investor to lose money as nearly every major asset class benchmark posted positive returns
  • Other than healthcare, every one of our equity region, sector and style benchmarks posted gains
  • Bonds performed strongly as risk-adjusted returns outpaced equities worldwide
  • Investment grade credit risk was again highly rewarded, but high yield was not
  • Energy commodities continued to rise, while base and precious metals continued to fall
  • All of our short volatility and variance factors produced positive returns
  • Momentum and trend following strategies struggled once again
  • We currently estimate that hedge funds returned -0.16% in February, 0.06% less than our initial estimate of ‐0.10%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.41% last week as gains from equities again fueled returns
  • Hedge funds are now up 1.29% for the month and down 0.93% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.28%), equity size (0.13%) and equity sector beta (0.09%)
  • It indicates negative contributions from alpha (-0.15%), high yield credit spreads (‐0.06%) and equity sector momentum (‐0.03%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.15%, -0.26% and -0.23%, respectively

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (2.46%), Latin America (1.34%) and Energy (1.23%)
  • Laggards: Healthcare (‐0.92%), Equity Short-Bias (‐0.55%) and Equity Market Neutral (0.02%)
  • North American hedge funds trailed both Asian and European funds
  • Equity beta was the dominant factor behind most strategy returns
  • Alpha leaders: Managed Futures (0.68%), Equity Short-Bias (0.34%) and Commodities (0.10%)
  • Alpha laggards: Special Situations (‐0.57%), Energy (‐0.52%) and Emerging Europe (‐0.50%)

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Global Benchmarks

  • It was almost impossible for a well-diversified investor to lose money as nearly every major asset class benchmark posted positive returns
  • Leaders: U.S. MLPs (5.04%), emerging EMEA equities (4.38%) and Latin American equities (3.37%)
  • Laggards: U.S. healthcare stocks (‐2.15%), gold futures (-0.41%) and precious metals futures (-0.12%)
  • Equities: other than healthcare, every one of our region, sector and style benchmarks posted gains
  • Bonds: bonds had a strong week worldwide as risk-adjusted returns outpaced equities
  • Real Estate: real estate rose along with broad equity markets
  • Commodities: energy commodities rose once again, but much less than in previous weeks; metals, both precious and base, suffered declines
  • Currencies: both developed and emerging currencies appreciated against the U.S. dollar
  • Multi‐asset: risk parity strategies strongly outperformed 60/40 due to healthy fixed income performance worldwide; global returns were similar to U.S. returns

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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. industrial stocks and the broad market (3.45%), developed ex-U.S. equity size (3.25%) and U.S. investment grade credit spreads (2.74%)
  • Laggards: the spread between U.S. industrial stocks and the broad market (‐4.02%), the spread between developed ex-U.S. real estate and small cap equities (‐2.52%) and 1-year developed ex-U.S. equity sector momentum (‐2.21%)
  • Commodities: oil rose, but momentum, trend following and term structure strategies fell
  • Credit: investment grade credit produced strong returns, but high yield did not
  • Equity: beta and value strategies worked well in developed markets while momentum and trend following strategies underperformed
  • Fixed Income: government bond term structure strategies displayed strength globally
  • Foreign Exchange: emerging market currencies had a particularly strong week; alpha strategies tended to be losers, however
  • 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: option writing strategies were flat but 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 21 of 30 strategies
  • We were within 25 basis points for 8 indexes and within 50 basis points for 15
  • Both our hit rate and our accuracy were below average
  • We currently estimate that hedge funds returned -0.16% in February, 0.06% less than our initial estimate of ‐0.10%
  • 13 strategies performed better than we anticipated; 17 performed worse
  • Most accurate: Emerging Markets (within 4 basis points), Event Driven (within 5 bps) and Hedge Funds (within 6 bps)
  • Most significant misses: Equity Short Bias (2.70% better than expected), Healthcare (1.90% worse) and Special Situations (1.38% better)
  • Overall, our estimates resulted in a 50% reduction in variance relative to naïve forecasts of flat returns

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