EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: May 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 0.31% in May as as modest, but broadly diversified factor gains fueled returns
  • Hedge funds are now up 0.21% for the year
  • 22 of the 30 hedge fund strategies we track earned positive returns
  • Hedge funds returned 0.73% in April, which is equal to our initial projection
  • Equities gained in the U.S., but foreign currency losses stifled the U.S. dollar returns of foreign assets
  • Most equity sectors and styles rose in the U.S., but declined internationally after adjusting for currency losses
  • Fixed income performance was tepid worldwide
  • Gains in the energy complex lifted our broad commodity index despite above average losses in base and precious metals
  • Foreign currencies depreciated substantially against the U.S. dollar
  • All of our short volatility and variance strategies earned profits
  • Momentum and trend following strategies displayed extreme weakness in and across most asset classes

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.31% in May as as modest, but broadly diversified factor gains fueled returns
  • Hedge funds are now up 0.21% for the year
  • Our factor attribution analysis suggests positive monthly contributions from equity beta (0.36%), short volatility (0.18%) and equity value (0.08%)
  • It indicates negative monthly contributions from the spread between developed market equities and U.S. equities (-0.44%), currency momentum (-0.10%) and the spread between emerging market and developed market equities (-0.08%)
  • It estimates month-to-date and year-to-date alphas of -0.00% and -0.25%, respectively

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Strategy Performance

  • 22 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (2.28%), Technology (1.59%) and Special Situations (1.14%)
  • Laggards: Latin America (-2.96%), Managed Futures (-1.60%) and Emerging Europe (-1.27%)
  • 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: Emerging Europe (0.97%), Equity Short-Bias (0.37%) and Equity Market Neutral (0.34%)
  • Alpha laggards: Managed Futures (-1.02%), Latin America (-0.56%) and Convertible Arbitrage (-0.18%)

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Global Benchmarks

  • Equities gained in the U.S., but foreign currency losses stifled the U.S. dollar returns of foreign assets
  • Leaders: U.S. information technology equity (5.64%), oil futures (5.34%) and energy commodities (4.55%)
  • Laggards: Latin America equity (-10.29%), emerging EMEA equity (-7.80%) and base metals (-7.10%)
  • Equities: most sectors and styles rose in the U.S., but declined internationally due to depreciating currencies
  • Bonds: fixed income performance was tepid worldwide
  • Real Estate: real estate securities rose along with equities in the U.S., but declined overseas
  • Commodities: gains in the energy complex lifted our broad commodity index despite above average losses in base and precious metals
  • Currencies: foreign currencies depreciated substantially against the U.S. dollar
  • Multi-Asset: risk parity underperformed 60/40 both domestically and globally; global returns suffered from currency exposure

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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 (4.88%), the spread between Asian and emerging market equity (4.25%) and 1-year emerging market equity sector momentum (3.94%)
  • Laggards: emerging market equity value (-7.26%), emerging market currencies (-5.87%) and 1-month emerging market equity sector momentum (-5.65%)
  • Commodity: momentum, trend following and term structure strategies produced heavy losses
  • Credit: credit risk produced modest positive returns in most markets worldwide
  • Equity: size and value strategies tended to produce losses; momentum strategies declined materially in emerging markets
  • Fixed Income: currency-hedged term structure strategies produced strong returns in Europe
  • Foreign Exchange: all of our foreign exchange factors fell, with momentum and long foreign currency strategies losing the most
  • Multi-Asset: all of our multi-asset class momentum and trend following strategies declined
  • Real Estate: real estate securities slightly outperformed equities in the U.S., but greatly underperformed abroad
  • Risk: all of our short volatility and variance strategies earned profits, led by our short VIX futures factor
  • Momentum: momentum and trend following strategies displayed extreme weakness in and across most asset classes

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April 2016 Estimate Review

  • All of the indexes underlying our composite indexes have reported April returns
  • Hedge funds returned 0.73% in April, which is equal to our initial projection
  • 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
  • 16 strategies performed better than we anticipated; 13 performed worse
  • Most accurate: Hedge Funds (exact), Convertible Arbitrage (within 3 basis points) and Relative Value (within 4 bps)
  • Least accurate: Special Situations (1.97% better than expected), Energy (1.55% better) and Latin America (1.53% better)
  • Overall, our estimates were 88% more accurate than naive forecasts of flat returns

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