EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: June 27, 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 0.94% last week as global equity losses crippled returns
  • Hedge funds are now down 1.20% for the month and 0.91% for the year
  • Only one of the 30 hedge fund strategies we track earned positive returns
  • We currently estimate that hedge funds returned 0.42% in May, 0.11% more than our initial projection of 0.31%
  • Investors worldwide fled risky assets after the UK voted to leave the European Union
  • After surging earlier in the week, equities plummeted on Friday after the vote
  • U.S. fixed income securities rose, but foreign corporates fell along with stocks
  • Energy and agriculture losses led our broad commodity index downward
  • Developed market currencies depreciated substantially against the dollar
  • All of our short volatility and variance strategies declined
  • Trend following strategies struggled, but medium-term momentum strategies rose in most asset classes

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds fell 0.94% last week as global equity losses crippled returns
  • Hedge funds are now down 1.20% for the month and 0.91% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between emerging market and developed market equities (0.06%), equity value (0.03%) and currency momentum (0.03%)
  • It indicates negative weekly contributions from equity beta (-0.32%), alpha (-0.31%) and short volatility (-0.15%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.31%, 0.04% and -0.13%, respectively

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Strategy Performance

  • Only one of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Equity Short-Bias (1.86%), Equity Market Neutral (-0.21%) and Merger Arbitrage (-0.30%)
  • Laggards: Managed Futures (-1.95%), Emerging Europe (-1.60%) and Energy (-1.33%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (0.49%), Technology (0.07%) and Equity Long Only (0.01%)
  • Alpha laggards: Managed Futures (-1.28%), Emerging Asia (-0.53%) and Emerging Europe (-0.52%)

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Global Benchmarks

  • Investors worldwide fled risky assets after the UK voted to leave the European Union
  • Leaders: precious metals (2.14%), gold futures (2.14%) and base metals (1.75%)
  • Laggards: agricultural commodities (-6.62%), U.S. materials equity (-2.71%) and U.S. industrials equity (-2.35%)
  • Equities: After surging earlier in the week, equities plummeted on Friday after the vote
  • Bonds: U.S. fixed income securities rose, but foreign corporates fell along with stocks
  • Real Estate: real estate securities declined both in the U.S. and abroad
  • Commodities: metals gained, but energy and agriculture losses led our broad commodity index downward
  • Currencies: emerging currencies held even, but developed market currencies depreciated substantially against the dollar
  • Multi-Asset: risk parity outperformed 60/40, but all of our multi-asset class indexes declined

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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 emerging and developed market high yield credit (4.40%), the spread between U.S. telecommunications equity and the market (2.72%) and commodity term structure (2.70%)
  • Laggards: the spread between developed market and U.S. high yield credit (-3.49%), VIX futures term structure (-3.31%) and 1-month emerging market equity country momentum (-3.00%)
  • Commodity: term structure and gold factors gained, but most other commodity factors fell
  • Credit: most credit factors fell as investors fled developed markets corporate exposure
  • Equity: developed market value and size factors suffered, but medium-term momentum factors rose globally
  • Fixed Income: term structure strategies gained modestly both in the U.S. and Europe
  • Foreign Exchange: currency carry, value and momentum strategies all notched strong risk-adjusted returns
  • Multi-Asset: our multi-asset class momentum and trend following strategies produced mixed results
  • Real Estate: real estate securities outperformed small cap equities both in the U.S. and abroad
  • Risk: all of our short volatility and variance strategies declined, and several were among our worst performing factors
  • Momentum: trend following strategies struggled, but medium-term momentum strategies rose in most asset classes

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May 2016 Estimate Review

  • All 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 0.42% in May, 0.11% more than our initial projection of 0.31%
  • As of this moment, we correctly predicted the direction of 27 of 30 strategies
  • We were within 25 basis points for 13 indexes and within 50 basis points for 21
  • Our hit rate was about average but our accuracy was above average
  • 22 strategies performed better than we anticipated; eight performed worse
  • Most accurate: Relative Value (within 1 basis point), Multi-Strategy (within 4 bps) and Merger Arbitrage (within 5 bps)
  • Least accurate: Energy (2.38% better than expected), Emerging Europe (1.23% better) and Commodities (0.91% better)
  • Overall, our estimates were 74% more accurate than naive forecasts of flat returns

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