EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: March 2016

The following is an excerpt from our Hedge Funds Monthly report, which is available in the clients section.

Highlights

  • Our factor-based estimates project that hedge funds added 1.62% in March as a strong month from equities fueled returns
  • Hedge funds are now down 0.71% for the year
  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Hedge funds returned -0.26% in February, 0.16% less than our initial estimate of -0.10%
  • Of our entire global benchmark universe, only our 10-year U.S. Treasury index failed to produce gains
  • Equity beta, size and value factors rose, both in the U.S. and internationally
  • Foreign and corporate bonds produced very strong risk-adjusted returns
  • Commodities trailed other asset classes, but managed to rise nevertheless
  • Foreign currencies soared relative to the U.S. dollar
  • Option writing, short volatility and short variance strategies accumulated gains as equities rallied
  • Momentum and trend following strategies notched heavy losses in and across most asset classes

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 1.62% in March as a strong month from equities fueled returns
  • Hedge funds are now down 0.71% for the year
  • Our factor attribution analysis suggests positive monthly contributions from equity beta (1.40%), short volatility (0.35%) and the spread between emerging market and developed market equities (0.16%)
  • It indicates negative monthly contributions from alpha (-0.17%), multi-asset class trend following (-0.12%) and developed currencies (-0.09%)
  • It estimates month-to-date and year-to-date alphas of -0.17% and -0.16%, respectively

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Strategy Performance

  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (7.58%), Emerging Europe (7.54%) and Emerging Asia (4.75%)
  • Laggards: Equity Short-Bias (-2.76%), Managed Futures (-1.45%) and Commodities (-0.05%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (1.81%), Distressed Securities (0.28%) and Technology (0.20%)
  • Alpha laggards: Energy (-1.77%), Managed Futures (-0.88%) and Emerging Markets (-0.55%)

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Global Benchmarks

  • Of our entire global benchmark universe, only our 10-year U.S. Treasury index failed to produce gains
  • Leaders: Latin America equity (19.53%), emerging EMEA equity (15.24%) and emerging market equity (12.66%)
  • Laggards: U.S. 10-year Treasuries (-0.15%), gold futures (0.03%) and cash (0.03%)
  • Equities: performance was strong, as every sector, region and style rose
  • Bonds: foreign and corporate bonds produced very strong risk-adjusted returns
  • Real Estate: real estate joined in the rally, outgaining equity indexes both domestically and abroad
  • Commodities: commodities trailed other asset classes, but managed to rise nevertheless
  • Currencies: foreign currencies, particularly those in emerging markets, rallied materially relative to the U.S. dollar
  • Multi-Asset: balanced strategies produced very strong gains, with risk parity methodologies outperforming 60/40

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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. investment grade bonds and Treasury bonds (9.36%), emerging market currencies (8.90%) and emerging market equity value (7.62%)
  • Laggards: emerging market equity country trend following (-5.66%), developed market equity country trend following (-5.53%) and 1-year multi-asset class momentum (-4.92%)
  • Commodity: commodity betas rose, but momentum, trend following and term structure strategies struggled
  • Credit: investment grade spreads had an exceptionally strong month
  • Equity: beta, size and value factors rose, both in the U.S. and internationally
  • Fixed Income: inflation-linked securities outperformed Treasuries, while international bonds benefited from currency shifts
  • Foreign Exchange: foreign currencies soared relative to the U.S. dollar; momentum and value strategies suffered
  • Multi-Asset: all of our momentum and trend following factors declined materially
  • Real Estate: real estate matched or exceeded small cap equities both in the U.S. and overseas
  • Risk: option writing, short volatility and short variance strategies accumulated gains as equities rallied
  • Momentum: momentum and trend following strategies notched heavy losses in and across most asset classes

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February 2016 Estimate Review

  • All of the indexes underlying our composite indexes have reported February returns
  • Hedge funds returned -0.26% in February, 0.16% less than our initial estimate of -0.10%
  • We correctly predicted the direction of 22 of 30 strategies
  • We were within 25 basis points for eight indexes and within 50 basis points for 16
  • Both our hit rate and our accuracy were below average
  • 11 strategies performed better than we anticipated; 18 performed worse
  • Most accurate: Emerging Markets (exact), Equity Long Only (within 1 basis point) and Merger Arbitrage (within 3 bps)
  • Least accurate: Equity Short-Bias (2.94% better than expected), Latin America (2.38% better) and Emerging Europe (2.05% better)
  • Overall, our estimates resulted in a 47% reduction in variance relative to naive forecasts of flat returns

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