EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: April 11, 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 0.01% last week as mixed factor performance muted returns
  • Hedge funds are now flat for the month and down 0.91% for the year
  • 15 of the 30 hedge fund strategies we track earned positive returns
  • We currently project that hedge funds returned 1.42% in March, 0.20% less than our initial estimate of 1.62%
  • Returns to diversified investors were modest as equities declined and bonds rose
  • Equities gained in developed foreign markets, but struggled elsewhere
  • All of our bond benchmarks rose, with developed market government bonds leading the way
  • Energy commodities had a very strong week, but base metals and agricultural commodities lagged
  • Developed market currencies appreciated against the dollar, but emerging market currencies depreciated
  • Short volatility strategies produced losses, but short variance strategies produced gains
  • Trend following and momentum were losing strategies in most asset classes besides equities

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.01% last week as mixed factor performance muted returns
  • Hedge funds are now flat for the month and down 0.91% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and U.S. equities (0.31%), alpha (0.08%) and oil beta (0.06%)
  • It indicates negative weekly contributions from equity beta (-0.24%), short volatility (-0.09%) and commodity momentum (-0.06%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.08%, 0.24% and -0.12%, respectively

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Strategy Performance

  • 15 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Energy (0.55%), Equity Short-Bias (0.52%) and Asia (0.49%)
  • Laggards: Latin America (-0.73%), Equity Long Only (-0.39%) and Equity Value (-0.32%)
  • North American funds trailed both Asian and European funds
  • The spread between developed market equities and U.S. equities was the most significant factor driving strategy returns
  • Alpha leaders: Emerging Europe (0.38%), Managed Futures (0.32%) and Convertible Arbitrage (0.30%)
  • Alpha laggards: Equity Short-Bias (-0.55%), Distressed Securities (-0.07%) and Merger Arbitrage (-0.03%)

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Global Benchmarks

  • Energy commodities rallied while bonds displayed strength in the face of equity declines
  • Leaders: oil futures (7.95%), energy commodities (6.99%) and U.S. MLPs (2.56%)
  • Laggards: base metals (-2.82%), Latin America equity (-2.76%) and U.S. financials equity (-2.63%)
  • Equities: equities gained in developed foreign markets, but struggled elsewhere
  • Bonds: all of our benchmarks rose, with developed market government bonds leading the way
  • Real Estate: real estate securities rose overseas, but U.S. REITs declined
  • Commodities: energy commodities had a very strong week, but base metals and agricultural commodities lagged
  • Currencies: developed market currencies appreciated against the dollar, but emerging market currencies depreciated
  • Multi-Asset: risk parity outperformed 60/40 once again due to leveraged bond exposure; global strategies outpaced U.S. strategies

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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. energy equity and the market (2.49%), oil futures (2.48%) and the spread between U.S. healthcare equity and the market (2.30%)
  • Laggards: U.S. equity value (-3.38%), 1-month developed market equity country momentum (-2.23%) and 1-year commodity momentum (-1.88%)
  • Commodity: commodity betas rose, but medium-term momentum, trend following and term structure strategies fell
  • Credit: short-dated investment grade bonds modestly outperformed Treasuries, but high yield and foreign corporate bonds underperformed
  • Equity: value and trend following strategies underperformed in most markets, but medium-term momentum posted small gains
  • Fixed Income: term structure strategies performed strongly in the U.S. and poorly abroad
  • Foreign Exchange: value strategies were well-rewarded; carry strategies were not
  • Multi-Asset: all three of our momentum and trend following factors declined
  • Real Estate: real estate outperformed small cap equities in both the U.S. and in developed markets
  • Risk: short volatility strategies produced losses, but short variance strategies produced gains
  • Momentum: trend following and momentum were losing strategies in most asset classes besides equities

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March 2016 Estimate Review

  • Most of the indexes underlying our composite indexes have reported March returns, so our analysis is preliminary and subject to change
  • We currently project that hedge funds returned 1.42% in March, 0.20% less than our initial estimate of 1.62%
  • As of this moment, we correctly predicted the direction of 29 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
  • 18 strategies performed better than we anticipated; 12 performed worse
  • Most accurate: North America (within 5 basis points), Distressed Securities (within 9 bps) and Merger Arbitrage (within 11 bps)
  • Least accurate: Latin America (3.25% better than expected), Equity Short-Bias (-2.92% worse) and Emerging Markets (1.58% better)
  • Overall, our estimates resulted in a 93% reduction in variance relative to naive forecasts of flat returns

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