EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: April 18, 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 0.65% last week as rising equities lifted returns
  • Hedge funds are now up 0.55% for the month and down 0.39% for the year
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • We currently project that hedge funds returned 1.40% in March, 0.22% less than our initial estimate of 1.62%
  • Gains from equities and commodities helped balanced investors overcome bond losses
  • Nearly all of our equity benchmarks rose, with only our U.S. consumer staples index failing to post a gain
  • Developed market government bonds struggled worldwide
  • Commodity beta generated a positive return, but performance from other commodity factors was mixed
  • Developed market currencies depreciated against the dollar, but emerging market currencies appreciated
  • All of our short volatility and variance strategies earned positive returns
  • Medium-term momentum strategies declined in most asset classes

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.65% last week as rising equities lifted returns
  • Hedge funds are now up 0.55% for the month and down 0.39% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.36%), the spread between developed market equities and U.S. equities (0.24%) and equity sector beta (0.14%)
  • It indicates negative weekly contributions from alpha (-0.13%), equity size (-0.12%) and equity value (-0.07%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.13%, 0.02% and -0.37%, respectively

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (1.98%), Emerging Europe (1.52%) and Equity Long Only (1.47%)
  • Laggards: Equity Short-Bias (-0.97%), Managed Futures (-0.06%) and Equity Market Neutral (0.09%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (0.52%), Equity Market Neutral (0.10%) and Healthcare (0.07%)
  • Alpha laggards: Emerging Asia (-0.73%), Asia (-0.53%) and Latin America (-0.47%)

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Global Benchmarks

  • Equities and commodities notched healthy returns, but developed market government bonds displayed weakness
  • Leaders: Latin America equity (5.81%), developed Asia-Pacific equity (5.01%) and U.S. financials equity (3.75%)
  • Laggards: gold futures (-0.74%), U.S. consumer staples equity (-0.61%) and developed ex-U.S. government bonds (-0.59%)
  • Equities: nearly all of our benchmarks rose, with only our U.S. consumer staples index failing to post a gain
  • Bonds: developed market government bonds struggled but emerging market bonds and corporate bonds produced gains
  • Real Estate: real estate securities rose worldwide, but the U.S. gain was small
  • Commodities: gold fell, but each major commodity sector rose, led by base metals
  • Currencies: developed market currencies depreciated against the dollar, but emerging market currencies appreciated
  • Multi-Asset: risk parity underperformed 60/40 due to leveraged bond exposure, while global 60/40 moderately outpaced U.S. 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: developed market equity value (3.99%), emerging market equity value (3.04%) and 1-month developed market equity sector momentum (2.84%)
  • Laggards: developed market equity size (-3.07%), 1-year developed market equity sector momentum (-2.69%) and the spread between U.S. consumer staples equity and the market (-2.55%)
  • Commodity: commodity beta generated a positive return, but performance from other factors was mixed
  • Credit: spreads tightened and credit risk earned a premium
  • Equity: value strategies were winners while medium-term momentum produced material losses
  • Fixed Income: term structure strategies performed poorly both in the U.S. and abroad
  • Foreign Exchange: emerging market currencies and carry strategies earned healthy returns
  • Multi-Asset: our momentum and trend following factors produced mixed results, with medium-term momentum exhibiting weakness
  • Real Estate: real estate substantially underperformed equities globally
  • Risk: all of our short volatility and variance strategies earned positive returns
  • Momentum: medium-term momentum strategies declined in most asset classes, but trend following strategies tended to gain

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March 2016 Estimate Review

  • Most of the indexes underlying our composite indexes have reported March returns, but our analysis is still preliminary and subject to change
  • We currently project that hedge funds returned 1.40% in March, 0.22% 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 11 indexes and within 50 basis points for 17
  • Our hit rate was above average but our accuracy was about average
  • 18 strategies performed better than we anticipated; 12 performed worse
  • Most accurate: Merger Arbitrage (within 4 basis points), Distressed Securities (within 6 bps) and Convertible Arbitrage (within 12 bps)
  • Least accurate: Equity Short-Bias (-5.07% worse than expected), Special Situations (4.40% better) and Latin America (1.33% better)
  • Overall, our estimates resulted in a 87% reduction in variance relative to naive forecasts of flat returns

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