EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: March 28, 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 fell 0.05% last week as equity losses trimmed month-to-date gains
  • Hedge funds are now up 1.25% for the month and down 1.04% for the year
  • 14 of the 30 hedge fund strategies we track earned positive returns
  • We currently project that hedge funds returned -0.23% in February, 0.13% less than our initial estimate of -0.10%
  • Almost all of our global benchmarks suffered losses as markets declined worldwide
  • Equities of nearly every region, sector and style fell
  • Most bond benchmarks finished the week down, but corporates notched modest gains
  • Energy commodities reversed course, suffering losses along with the other commodity sectors
  • Both developed and emerging currencies depreciated materially against the U.S. dollar
  • Short volatility and variance strategies earned small positive returns
  • Trend following strategies tended to earn positive returns regardless of asset class

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds fell 0.05% last week as equity losses trimmed month-to-date gains
  • Hedge funds are now up 1.25% for the month and down 1.04% for the year
  • Our factor attribution analysis suggests positive weekly contributions from alpha (0.18%), equity value (0.08%) and high yield credit spreads (0.04%)
  • It indicates negative weekly contributions from the spread between developed market equities and U.S. equities (-0.22%), equity beta (-0.16%) and the spread between MLPs and REITs (-0.04%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.18%, -0.04% and -0.08%, respectively

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Strategy Performance

  • 14 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Technology (0.27%), Healthcare (0.26%) and Multi-Strategy (0.22%)
  • Laggards: Emerging Europe (-1.33%), Energy (-1.14%) and Latin America (-0.87%)
  • North American funds trailed both Asian and European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Special Situations (0.62%), Emerging Europe (0.50%) and Emerging Asia (0.50%)
  • Alpha laggards: Managed Futures (-0.52%), Equity Short-Bias (-0.41%) and Commodities (-0.06%)

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Global Benchmarks

  • Almost all of our global benchmarks suffered losses as markets declined worldwide
  • Leaders: U.S. healthcare equity (0.66%), U.S. utilities equity (0.51%) and U.S. investment grade bonds (0.21%)
  • Laggards: U.S. MLPs (-4.72%), oil futures (-4.08%) and emerging EMEA equity (-3.19%)
  • Equities: nearly all of our region, sector and style benchmarks posted losses
  • Bonds: most benchmarks finished the week down, but corporate bonds notched modest gains
  • Real Estate: real estate securities fell alongside broad equity markets
  • Commodities: every sector declined, with energy futures suffering the largest losses
  • Currencies: both developed and emerging currencies depreciated materially against the U.S. dollar
  • Multi-Asset: global risk parity strongly lagged 60/40 due to leveraged currency exposure; U.S. returns outpaced global 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: 1-year developed market equity sector momentum (2.68%), the spread between 5-year U.S. investment grade bonds and 5-year Treasury bonds (2.22%) and 1-year developed market equity country momentum (2.12%)
  • Laggards: developed market equity value (-4.05%), the spread between global and U.S. inflation-linked securities (-2.55%) and developed market currencies (-2.02%)
  • Commodity: commodity betas fell, but trend following and term structure strategies rose
  • Credit: investment grade credit extended its already strong month-to-date performance
  • Equity: beta and value factors displayed weakness, but momentum and trend following strategies gained
  • Fixed Income: term structure strategies fell in the U.S., but notched modest gains overseas
  • Foreign Exchange: developed market currencies suffered material losses relative to the dollar
  • Multi-Asset: all three of our momentum and trend following factors rose
  • Real Estate: real estate outperformed small cap equities, both in the U.S. and abroad
  • Risk: option writing strategies declined modestly, while short volatility and variance strategies earned small positive returns
  • Momentum: trend following strategies tended to earn positive returns regardless of asset class

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February 2016 Estimate Review

  • All of the indexes underlying our composite indexes have reported February returns, but our analysis is preliminary and subject to change
  • We currently project that hedge funds returned -0.23% in February, 0.13% less than our initial estimate of -0.10%
  • As of this moment, we correctly predicted the direction of 20 of 30 strategies
  • We were within 25 basis points for seven indexes and within 50 basis points for 15
  • Both our hit rate and our accuracy were below average
  • 12 strategies performed better than we anticipated; 17 performed worse
  • Most accurate: Equity Long Only (exact), Equity Value (within 2 basis points) and Merger Arbitrage (within 6 bps)
  • Least accurate: Latin America (2.51% better than expected), Equity Short-Bias (2.28% better) and Emerging Europe (2.08% better)
  • Overall, our estimates resulted in a 41% reduction in variance relative to naive forecasts of flat returns

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