EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: April 2016

The following is an excerpt from our Hedge Funds Monthly 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 0.73% in April as equity gains, particularly among foreign stocks, fueled returns
  • Hedge funds are now down 0.10% for the year
  • All but three of the 30 hedge fund strategies we track earned positive returns
  • Hedge funds returned 1.54% in March, 0.08% less than our initial estimate of 1.62%
  • Momentum strategies struggled as numerous assets reversed their medium-term trends
  • Every major commodity sector posted strong returns, led by a massive rebound in oil futures
  • Energy stocks and MLPs rallied in the U.S., but foreign equity outpaced domestic equity
  • Investment grade and high yield credit exposure earned very strong risk-adjusted returns
  • Foreign currencies, particularly those in developed markets, appreciated against the U.S. dollar
  • Real estate securities underperformed equities both domestically and internationally
  • All of our short volatility and variance factors rose

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.73% in April as equity gains, particularly among foreign stocks, fueled returns
  • Hedge funds are now down 0.10% for the year
  • Our factor attribution analysis suggests positive monthly contributions from the spread between developed market equities and U.S. equities (0.43%), equity sector beta (0.18%) and the spread between MLPs and REITs (0.17%)
  • It indicates negative monthly contributions from alpha (-0.16%), multi-asset class momentum (-0.12%) and equity value (-0.10%)
  • It estimates month-to-date and year-to-date alphas of -0.16% and -0.34%, respectively

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Strategy Performance

  • All but three of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Energy (4.18%), Healthcare (3.47%) and Emerging Europe (3.32%)
  • Laggards: Managed Futures (-0.45%), Equity Short-Bias (-0.30%) and Merger Arbitrage (-0.01%)
  • North American funds outperformed 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: Healthcare (1.24%), Technology (0.23%) and Distressed Securities (0.20%)
  • Alpha laggards: Managed Futures (-0.86%), Energy (-0.76%) and Asia (-0.73%)

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Global Benchmarks

  • Oil soared, helping to propel energy-linked assets to strong returns in multiple asset classes
  • Leaders: oil futures (16.06%), energy commodities (15.00%) and U.S. MLPs (12.38%)
  • Laggards: U.S. information technology equity (-5.19%), U.S. REITs (-2.49%) and U.S. utilities equity (-1.95%)
  • Equities: energy stocks and MLPs rallied in the U.S., but foreign equity outpaced domestic equity
  • Bonds: U.S. corporate bonds significantly outperformed Treasuries
  • Real Estate: real estate securities declined in the U.S. but gained abroad; both tended to underperform equities, however
  • Commodities: all major commodity sectors posted strong returns, led by a massive rebound in oil futures
  • Currencies: foreign currencies, particularly those in developed markets, appreciated against the U.S. dollar
  • Multi-Asset: risk parity outperformed 60/40 due to leveraged bond exposure; U.S. returns trailed 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: the spread between U.S. energy equity and the market (6.13%), developed market equity value (5.81%) and commodity beta (5.76%)
  • Laggards: the spread between U.S. information technology equity and the market (-7.36%), 1-year U.S. sector momentum (-6.36%) and 1-year developed market equity sector momentum (-3.88%)
  • Commodity: alternative strategies such as momentum and term structure struggled as commodities betas rallied
  • Credit: investment grade and high yield credit exposure earned very strong risk-adjusted returns
  • Equity: value factors rose materially overseas while medium-term momentum strategies struggled worldwide
  • Fixed Income: term structure strategies declined in both the U.S. and Europe
  • Foreign Exchange: each of our major currency factors earned profits, led by value strategies and developed market currencies
  • Multi-Asset: all three of our momentum and trend following strategies struggled
  • Real Estate: real estate security performance was underwhelming, particularly relative to small cap equities
  • Risk: all of our short volatility and variance factors rose, led by our VIX futures term structure index
  • Momentum: momentum produced positive returns among currencies, but failed almost everywhere else

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March 2016 Estimate Review

  • All of the indexes underlying our composite indexes have reported March returns
  • Hedge funds returned 1.54% in March, 0.08% less than our initial estimate of 1.62%
  • We correctly predicted the direction of 30 of 30 strategies
  • We were within 25 basis points for eight indexes and within 50 basis points for 16
  • Our hit rate was above average but our accuracy was about average
  • 16 strategies performed better than we anticipated; 14 performed worse
  • Most accurate: Hedge Funds (within 8 basis points), Convertible Arbitrage (within 9 bps) and Distressed Securities (within 11 bps)
  • Least accurate: Special Situations (2.60% better than expected), Emerging Asia (2.45% better) and Equity Short-Bias (-1.80% worse)
  • Overall, our estimates resulted in a 93% reduction in variance relative to naive forecasts of flat returns

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