EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: May 30, 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 0.67% last week as rising U.S. equities fueled returns
  • Hedge funds are now up 0.22% for the month and 0.12% for the year
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • We currently project that hedge funds returned 0.72% in April, 0.01% less than our initial estimate of 0.73%
  • Global equity strength rewarded investors and helped trim month-to-date losses in well-diversified portfolios
  • Nearly every one of our equity style, sector and regional indexes gained
  • Government bond returns were muted, but corporate bonds profited from investor demand for credit risk
  • Gold and other precious metals fell, but all of the other major commodity sectors earned positive returns
  • Foreign currencies appreciated modestly against the U.S. dollar
  • Almost all of our short volatility and variance factors posted gains
  • Momentum strategies produced losses in most asset classes

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.67% last week as rising U.S. equities fueled returns
  • Hedge funds are now up 0.22% for the month and 0.12% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.48%), short volatility (0.09%) and equity country momentum (0.05%)
  • It indicates negative weekly contributions from the spread between developed market equities and U.S. equities (-0.05%), equity size (-0.04%) and the spread between MLPs and REITs (-0.04%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.03%, -0.04% and -0.40%, respectively

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Asia (1.79%), Healthcare (1.63%) and Equity Long Only (1.45%)
  • Laggards: Equity Short-Bias (-1.31%), Latin America (-0.16%) and Equity Market Neutral (0.25%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (0.42%), Special Situations (0.19%) and Managed Futures (0.14%)
  • Alpha laggards: Emerging Asia (-0.17%), Emerging Markets (-0.14%) and Latin America (-0.12%)

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Global Benchmarks

  • Global equity strength rewarded investors and helped trim month-to-date losses in well-diversified portfolios
  • Leaders: U.S. information technology equity (3.77%), emerging Asia equity (3.64%) and U.S. small cap equity (3.21%)
  • Laggards: gold futures (-3.12%), precious metals (-2.85%) and U.S. MLPs (-1.66%)
  • Equities: equities had a strong week globally as nearly every one of our style, sector and regional indexes gained
  • Bonds: government bond returns were muted, but corporate bonds profited from investor demand for credit risk
  • Real Estate: real estate securities rose along with equities
  • Commodities: gold and other precious metals fell, but all of the other major sectors earned positive returns
  • Currencies: foreign currencies appreciated modestly against the U.S. dollar
  • Multi-Asset: balanced portfolios notched healthy gains, with 60/40 slightly outperforming risk parity on a risk-adjusted basis

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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. information technology equity and the market (1.79%), 1-year emerging market equity country momentum (1.78%) and short short-dated VIX futures (1.56%)
  • Laggards: the spread between Latin American and emerging market equity (-2.77%), gold futures (-1.82%) and 1-year multi-asset class momentum (-1.78%)
  • Commodity: term structure and medium-term momentum strategies declined, but trend following produced profits
  • Credit: credit risk earned positive returns in most markets worldwide
  • Equity: factor performance differed greatly by region, but all regions benefited from beta gains
  • Fixed Income: term structure strategies produced modest gains domestically and abroad
  • Foreign Exchange: carry strategies underperformed, but each of our other currency factors generated moderate profits
  • Multi-Asset: momentum strategies fell materially, but trend following strategies rose
  • Real Estate: real estate securities underperformed equities worldwide
  • Risk: our VIX term structure strategy was the only strategy to decline
  • Momentum: trend following strategies were broadly successful, but momentum strategies produced losses in most asset classes

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April 2016 Estimate Review

  • All 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 0.72% in April, 0.01% 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 14 indexes and within 50 basis points for 21
  • Both our hit rate and our accuracy were above average
  • 15 strategies performed better than we anticipated; 15 performed worse
  • Most accurate: Hedge Funds (within 1 basis point), Distressed Securities (within 4 bps) and Event Driven (within 4 bps)
  • Least accurate: Special Situations (1.84% better than expected), Latin America (1.57% better) and Emerging Europe (1.56% better)
  • Overall, our estimates were 89% more accurate than naive forecasts of flat returns

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