EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: May 16, 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 fell 0.07% last week as equity declines fueled losses
  • Hedge funds are now down 0.74% for the month and 0.83% for the year
  • 11 of the 30 hedge fund strategies we track earned positive returns
  • We currently project that hedge funds returned 0.73% in April, which is equal to our initial estimate
  • Commodities rose, but most other risky assets fell as investors favored fixed income securities
  • Most equity sectors, regions and styles fell as stocks declined globally
  • U.S. and emerging market bonds gained, but developed market bonds struggled
  • Commodity term structure was the week’s worst performing strategy
  • Both developed and emerging market currencies depreciated against the U.S. dollar
  • Most of our short volatility and variance factors posted modest gains
  • Trend following strategies produced weak returns in most asset classes, while momentum generated mixed results

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds fell 0.07% last week as equity declines fueled losses
  • Hedge funds are now down 0.74% for the month and 0.83% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity value (0.05%), the spread between developed market equities and U.S. equities (0.04%) and agricultural commodity beta (0.02%)
  • It indicates negative weekly contributions from equity beta (-0.10%), equity sector beta (-0.04%) and alpha (-0.03%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.03%, -0.05% and -0.38%, respectively

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Strategy Performance

  • 11 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Equity Short-Bias (0.50%), Healthcare (0.41%) and Fixed Income Arbitrage (0.20%)
  • Laggards: Emerging Asia (-0.56%), Asia (-0.31%) and Equity Long Only (-0.29%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Emerging Europe (0.22%), Healthcare (0.19%) and Emerging Asia (0.17%)
  • Alpha laggards: Technology (-0.12%), Equity Long Only (-0.12%) and Europe (-0.11%)

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Global Benchmarks

  • Commodities rose, but most other risky assets fell as investors favored fixed income securities
  • Leaders: energy commodities (4.05%), oil futures (3.43%) and agricultural commodities (2.89%)
  • Laggards: base metals (-3.50%), precious metals (-1.76%) and gold futures (-1.65%)
  • Equities: most sectors, regions and styles fell as equities declined globally
  • Bonds: U.S. and emerging market bonds gained, but developed market bonds struggled
  • Real Estate: real estate securities underperformed both in the U.S. and overseas
  • Commodities: base and precious metals declined, but commodities overall rose due to gains in energy commodities
  • Currencies: both developed and emerging market currencies depreciated against the U.S. dollar
  • Multi-Asset: U.S. balanced portfolios outperformed global portfolios, but neither did particularly well

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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: 1-year U.S. equity momentum (2.23%), the spread between emerging market and U.S. government bonds (2.01%) and the spread between emerging market and global aggregate bonds (1.74%)
  • Laggards: commodity term structure (-3.59%), developed market equity value (-2.73%) and U.S. equity value (-2.39%)
  • Commodity: momentum and trend following strategies declined, and term structure was the week’s worst performing factor
  • Credit: longer dated corporate bonds underperformed Treasuries, but most credit factors had muted returns
  • Equity: value stocks materially underperformed growth stocks while small caps underperformed large caps in the U.S.
  • Fixed Income: term structure strategies gained in the U.S. and Europe; emerging market bonds did particularly well
  • Foreign Exchange: carry strategies gained, but each of our other currency factors fell
  • Multi-Asset: short-term momentum rose, but longer-dated momentum and trend following strategies declined
  • Real Estate: real estate securities underperformed equities worldwide
  • Risk: most of our short volatility and variance factors posted modest gains
  • Momentum: trend following strategies produced weak returns in most asset classes, while momentum generated mixed results

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April 2016 Estimate Review

  • Most of the indexes underlying our composite indexes have reported April returns, but our analysis is still preliminary and subject to change
  • We currently project that hedge funds returned 0.73% in April, which is equal to our initial estimate
  • As of this moment, we correctly predicted the direction of 28 of 30 strategies
  • We were within 25 basis points for 15 indexes and within 50 basis points for 22
  • Both our hit rate and our accuracy were above average
  • 16 strategies performed better than we anticipated; 12 performed worse
  • Most accurate: Technology (exact), Hedge Funds (exact) and Global Macro (within 1 basis point)
  • Least accurate: Special Situations (2.31% better than expected), Emerging Europe (1.16% better) and Energy (1.12% better)
  • Overall, our estimates were 89% more accurate than naive forecasts of flat returns

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