EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: June 20, 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 0.42% last week as declining equities precipitated losses
  • Hedge funds are now down 0.12% for the month and up 0.24% for the year
  • Only two of the 30 hedge fund strategies we track earned positive returns
  • We currently estimate that hedge funds returned 0.46% in May, 0.15% more than our initial projection of 0.31%
  • Risky assets declined worldwide as investors gravitated towards the safety of U.S. Treasuries
  • Equities fell globally, but were hit hardest in developed foreign markets
  • U.S. Treasuries rose, but corporate securities and foreign bonds declined
  • Most commodity sectors gained, but declining oil prices drove our broad market index down
  • Currency value produced a strong profit, but returns to other currency factors were modest
  • Most of our short volatility and variance strategies declined
  • Equity momentum and trend following strategies struggled

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds fell 0.42% last week as declining equities precipitated losses
  • Hedge funds are now down 0.12% for the month and up 0.24% for the year
  • Our factor attribution analysis suggests positive weekly contributions from alpha (0.30%), the spread between emerging market and developed market equities (0.03%) and equity country momentum (0.03%)
  • It indicates negative weekly contributions from the spread between developed market equities and U.S. equities (-0.27%), equity beta (-0.23%) and short volatility (-0.09%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.30%, 0.48% and 0.38%, respectively

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Strategy Performance

  • Only two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Equity Short-Bias (0.57%), Commodities (0.02%) and Fixed Income Arbitrage (-0.04%)
  • Laggards: Equity Long Only (-1.21%), Healthcare (-1.12%) and Asia (-0.99%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Emerging Asia (0.45%), Special Situations (0.37%) and Emerging Europe (0.34%)
  • Alpha laggards: Equity Short-Bias (-0.42%), Managed Futures (-0.08%) and Energy (-0.04%)

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Global Benchmarks

  • Risky assets declined worldwide as investors gravitated towards the safety of U.S. Treasuries
  • Leaders: U.S. telecommunications equity (1.49%), gold futures (1.49%) and precious metals (1.30%)
  • Laggards: developed Asia-Pacific equity (-3.44%), developed ex-U.S. equity (-2.83%) and emerging EMEA equity (-2.62%)
  • Equities: equities fell globally, but were hit hardest in developed foreign markets
  • Bonds: U.S. Treasuries rose, but corporate securities and foreign bonds declined
  • Real Estate: real estate securities plummeted overseas, but gained modestly in the U.S.
  • Commodities: most sectors gained, but declining oil prices drove our broad market index down for the week
  • Currencies: emerging currencies depreciated materially against the U.S. dollar, but developed currencies appreciated slightly
  • Multi-Asset: risk parity outperformed 60/40, but all of our multi-asset class indexes fell

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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. telecommunications equity and the market (2.45%), currency value (2.25%) and the spread between U.S. REITs and small cap equities (1.79%)
  • Laggards: the spread between developed market real estate securities and U.S. REITs (-2.29%), VIX futures term structure (-2.27%) and the spread between U.S. 10-year inflation-linked bonds and 10-year U.S. Treasuries (-1.99%)
  • Commodity: gold and medium-term momentum factors outperformed, while beta factors declined
  • Credit: most credit factors fell as investors fled corporate exposure
  • Equity: a strong majority of our developed market equity factors lost value
  • Fixed Income: term structure strategies gained in the U.S., but most of our other fixed income factors declined
  • Foreign Exchange: currency value produced a strong profit, but returns to other factors were modest
  • Multi-Asset: our multi-asset class momentum and trend following strategies generated mixed results
  • Real Estate: real estate securities outperformed small cap equities both in the U.S. and abroad
  • Risk: most of our short volatility and variance strategies declined
  • Momentum: momentum and trend following strategies struggled among equities, but tended to work in other asset classes

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May 2016 Estimate Review

  • Most of the indexes underlying our composite indexes have reported May returns, but our analysis is still preliminary and subject to change
  • We currently estimate that hedge funds returned 0.46% in May, 0.15% more than our initial projection of 0.31%
  • 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 26
  • Both our hit rate and our accuracy were above average
  • 23 strategies performed better than we anticipated; seven performed worse
  • Most accurate: Merger Arbitrage (within 1 basis point), Relative Value (within 2 bps) and Latin America (within 5 bps)
  • Least accurate: Energy (2.49% better than expected), Commodities (0.84% better) and Europe (0.53% better)
  • Overall, our estimates were 78% more accurate than naive forecasts of flat returns

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