EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: June 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 0.01% in June as alpha gains offset equity losses
  • Hedge funds are now up 0.29% for the year
  • 16 of the 30 hedge fund strategies we track earned positive returns
  • Hedge funds returned 0.41% in May, 0.10% more than our initial projection of 0.31%
  • Brexit initially roiled markets, but wound up being a small blip in an otherwise good month for balanced portfolios
  • Developed market losses drove down global equity indexes, but emerging market equities fared well
  • Government bond performance was very strong worldwide, particularly on a risk-adjusted basis
  • Gold and other precious metals were among the week’s best performing assets
  • Currency carry, value and momentum strategies all notched strong risk-adjusted returns as foreign currencies appreciated against the dollar
  • Most of our short volatility and variance strategies declined, but U.S. option writing strategies rose
  • Trend following and medium-term momentum strategies gained in most asset classes

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.01% in June as alpha gains offset equity losses
  • Hedge funds are now up 0.29% for the year
  • Our factor attribution analysis suggests positive monthly contributions from alpha (0.47%), the spread between emerging market and developed market equities (0.23%) and currency momentum (0.21%)
  • It indicates negative monthly contributions from the spread between developed market equities and U.S. equities (-0.53%), equity sector beta (-0.32%) and short volatility (-0.17%)
  • It estimates month-to-date and year-to-date alphas of 0.47% and 0.29%, respectively

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Strategy Performance

  • 16 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (3.67%), Managed Futures (2.52%) and Emerging Asia (0.91%)
  • Laggards: Equity Long Only (-1.55%), Europe (-1.02%) and Emerging Europe (-0.93%)
  • North American funds outperformed both Asian and European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Managed Futures (1.60%), Special Situations (1.38%) and Healthcare (1.02%)
  • Alpha laggards: Equity Short-Bias (-0.96%), Technology (-0.25%) and Equity Long Only (-0.25%)

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Global Benchmarks

  • Brexit initially roiled markets, but wound up being a small blip in an otherwise good month for balanced portfolios
  • Leaders: Latin America equity (10.94%), precious metals (9.85%) and gold futures (8.49%)
  • Laggards: developed Europe equity (-4.98%), developed ex-U.S. equity (-2.96%) and oil futures (-2.76%)
  • Equities: developed market losses drove down global equity indexes, but emerging market equities fared well
  • Bonds: government bond performance was very strong worldwide, particularly on a risk-adjusted basis
  • Real Estate: REITs rallied, but global real estate securities posted only modest gains
  • Commodities: metals, particularly precious metals, were among the week’s best performing assets
  • Currencies: world currencies appreciated against the dollar, with emerging currencies notching the largest gains
  • Multi-Asset: risk parity materially outperformed 60/40 due to exceptional risk-adjusted 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 emerging and developed market equity indexes (7.33%), the spread between U.S. telecommunications equity and the market (7.26%) and the spread between emerging and developed market equity (7.20%)
  • Laggards: U.S. equity value (-6.47%), the spread between U.S. mortgage-backed securities and U.S. Treasuries (-6.24%) and 1-month emerging market equity country momentum (-5.67%)
  • Commodity: gold, term structure and medium-term momentum factors outperformed while short-term momentum underperformed
  • Credit: corporate bonds strongly underperformed government bonds in developed markets
  • Equity: size and value factors struggled, but medium-term momentum strategies earned healthy returns
  • Fixed Income: term structure strategies posted outsized returns both in the U.S. and Europe
  • Foreign Exchange: currency carry, value and momentum strategies all notched strong risk-adjusted returns
  • Multi-Asset: medium-term momentum and trend following strategies profited, but short-term momentum lagged
  • Real Estate: real estate securities materially outperformed small cap equities both in the U.S. and abroad
  • Risk: most of our short volatility and variance strategies declined, but U.S. option writing strategies rose
  • Momentum: trend following and medium-term momentum strategies gained in most asset classes

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May 2016 Estimate Review

  • All of the indexes underlying our composite indexes have reported May returns
  • Hedge funds returned 0.41% in May, 0.10% more than our initial projection of 0.31%
  • 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 23
  • Both our hit rate and our accuracy were above average
  • 20 strategies performed better than we anticipated; 10 performed worse
  • Most accurate: Relative Value (within 2 basis points), Merger Arbitrage (within 6 bps) and Special Situations (within 8 bps)
  • Least accurate: Energy (1.91% better than expected), Emerging Europe (1.27% better) and Europe (0.72% better)
  • Overall, our estimates were 78% more accurate than naive forecasts of flat returns

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