EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: May 23, 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 0.21% last week as rising U.S. equities produced profits
  • Hedge funds are now down 0.43% for the month and 0.57% for the year
  • All but six of the 30 hedge fund strategies we track earned positive returns
  • We currently project that hedge funds returned 0.68% in April, 0.05% less than our initial estimate of 0.73%
  • Modest equity gains were not enough to offset losses in other asset classes as balanced portfolios declined globally
  • Stocks tended to rise in developed economies and fall in emerging markets
  • Fixed income products performed poorly worldwide
  • Commodity beta rose, but most of our alternative factors fell
  • Both developed and emerging market currencies depreciated against the U.S. dollar
  • All of our short volatility and variance factors posted gains
  • Trend following and medium-term momentum strategies produced losses in most asset classes

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.21% last week as rising U.S. equities produced profits
  • Hedge funds are now down 0.43% for the month and 0.57% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity sector beta (0.09%), equity beta (0.08%) and the spread between MLPs and REITs (0.08%)
  • It indicates negative weekly contributions from currency momentum (-0.04%), the spread between emerging market and developed market equities (-0.04%) and the spread between developed market equities and U.S. equities (-0.03%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.02%, 0.02% and -0.38%, respectively

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Strategy Performance

  • All but six of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (1.03%), Energy (0.83%) and Equity Value (0.78%)
  • Laggards: Managed Futures (-1.01%), Latin America (-0.76%) and Equity Short-Bias (-0.60%)
  • North American funds outperformed both Asian and European funds
  • Equity sector beta was the most significant factor driving strategy returns
  • Alpha leaders: Emerging Europe (0.32%), Merger Arbitrage (0.15%) and Healthcare (0.12%)
  • Alpha laggards: Managed Futures (-0.46%), Latin America (-0.18%) and Energy (-0.15%)

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Global Benchmarks

  • Modest equity gains were not enough to offset losses in other asset classes as balanced portfolios declined globally
  • Leaders: U.S. MLPs (4.29%), oil futures (3.23%) and energy commodities (2.92%)
  • Laggards: Latin America equity (-3.39%), U.S. REITs (-2.63%) and U.S. utilities equity (-2.15%)
  • Equities: equity performance was mixed, as stocks generally rose in developed economies and fell in emerging markets
  • Bonds: fixed income products performed poorly worldwide, but losses were especially pronounced in the U.S.
  • Real Estate: U.S. REITs struggled, losing materially more than foreign real estate securities
  • Commodities: commodities gained due to rising oil prices, but most non-energy sectors declined
  • Currencies: foreign currencies depreciated against the U.S. dollar; emerging currencies underperformed developed currencies
  • Multi-Asset: risk parity substantially underperformed 60/40 due to poor bond performance

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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 (2.65%), the spread between U.S. mortgage-backed securities and U.S. Treasuries (2.02%) and 1-month commodity momentum (1.70%)
  • Laggards: the spread between U.S. consumer staples equity and the market (-2.47%), 1-year U.S. sector momentum (-2.20%) and the spread between U.S. REITs and small cap equities (-2.14%)
  • Commodity: commodity beta rose, but most of our alternative factors fell
  • Credit: credit risk tended to earn positive returns in developed markets
  • Equity: medium-term momentum strategies underperformed; value and size factors generated mixed results
  • Fixed Income: term structure strategies struggled, particularly in the U.S.
  • 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: all of our short volatility and variance factors posted gains
  • Momentum: trend following and medium-term momentum strategies produced losses in most asset classes

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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 0.68% in April, 0.05% less than our initial estimate of 0.73%
  • 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; 14 performed worse
  • Most accurate: Equity Long Only (within 1 basis point), Convertible Arbitrage (within 3 bps) and Hedge Funds (within 5 bps)
  • Least accurate: Special Situations (2.06% better than expected), Latin America (1.57% better) and Emerging Europe (1.56% better)
  • Overall, our estimates were 88% more accurate than naive forecasts of flat returns

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