EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: April 25, 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 0.31% last week as rising equities once again propelled returns
  • Hedge funds are now up 0.87% for the month and 0.04% for the year
  • All but four of the 30 hedge fund strategies we track earned positive returns
  • We currently project that hedge funds returned 1.53% in March, 0.09% less than our initial estimate of 1.62%
  • Poor government bond performance limited returns to diversified portfolios
  • Developed market equities posted modest gains while MLPs rallied
  • Credit risk generated healthy risk-adjusted returns
  • Energy and base metals lifted our broad commodity index to a strong return
  • Foreign currencies appreciated modestly against the U.S. dollar
  • Most of our short volatility and variance strategies earned positive returns
  • Medium-term momentum strategies performed very poorly in and across most asset classes

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.31% last week as rising equities once again propelled returns
  • Hedge funds are now up 0.87% for the month and 0.04% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between MLPs and REITs (0.14%), equity beta (0.12%) and the spread between developed market equities and U.S. equities (0.12%)
  • It indicates negative weekly contributions from equity size (-0.08%), alpha (-0.05%) and commodity momentum (-0.05%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.05%, -0.03% and -0.29%, respectively

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Strategy Performance

  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Energy (2.11%), Emerging Europe (1.47%) and Healthcare (1.45%)
  • Laggards: Managed Futures (-0.78%), Equity Short-Bias (-0.42%) and Global Macro (-0.06%)
  • North American funds outperformed both Asian and European funds
  • Equity sector beta was the most significant factor driving strategy returns
  • Alpha leaders: Technology (0.28%), Equity Short-Bias (0.23%) and Distressed Securities (0.13%)
  • Alpha laggards: Managed Futures (-0.37%), Energy (-0.36%) and Emerging Asia (-0.30%)

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Global Benchmarks

  • Commodities earned healthy profits, but poor bond performance suppressed returns to balanced portfolios
  • Leaders: U.S. MLPs (11.23%), energy commodities (5.81%) and U.S. energy equity (5.56%)
  • Laggards: U.S. utilities equity (-3.04%), U.S. consumer staples equity (-2.02%) and U.S. REITs (-1.86%)
  • Equities: developed market equities posted modest gains while MLPs rallied
  • Bonds: developed market government bonds struggled for the second consecutive week, but high yield rose
  • Real Estate: real estate securities fell in the U.S. and gained very slightly abroad
  • Commodities: energy and base metals had a very strong week, helping our broad market index to a 3.59% gain
  • Currencies: foreign currencies appreciated modestly against the U.S. dollar
  • Multi-Asset: risk parity underperformed 60/40 due to leveraged bond exposure; U.S. and global returns were similar

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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. MLPs and REITs (4.86%), the spread between U.S. energy equity and the market (3.58%) and U.S. equity value (2.99%)
  • Laggards: 1-year U.S. sector momentum (-4.54%), the spread between U.S. information technology equity and the market (-3.06%) and 1-year U.S. equity momentum (-2.94%)
  • Commodity: commodity beta produced a positive return, but momentum, trend following and term structure strategies struggled
  • Credit: credit risk generated strong returns both among investment grade and high yield bonds
  • Equity: MLPs soared relative to REITs while value strategies profited both in the U.S. and in foreign markets
  • Fixed Income: term structure strategies performed poorly both in the U.S. and abroad
  • Foreign Exchange: factor performance was relatively muted as momentum and value strategies underwhelmed
  • Multi-Asset: medium-term momentum and trend following performance was quite poor
  • Real Estate: real estate securities substantially underperformed equities in the U.S. and modestly underperformed overseas
  • Risk: most of our short volatility and variance factors earned positive returns, led by our VIX term structure strategy
  • Momentum: medium-term momentum strategies performed very poorly in and across most asset classes

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March 2016 Estimate Review

  • All 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 1.53% in March, 0.09% 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 14
  • Our hit rate was above average but our accuracy was below average
  • 17 strategies performed better than we anticipated; 13 performed worse
  • Most accurate: Convertible Arbitrage (within 5 basis points), Distressed Securities (within 7 bps) and Hedge Funds (within 9 bps)
  • Least accurate: Special Situations (3.49% better than expected), Emerging Asia (2.39% better) and Latin America (2.19% better)
  • Overall, our estimates resulted in a 92% reduction in variance relative to naive forecasts of flat returns

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