EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: July 11, 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 0.27% last week as widespread factor gains overcame foreign equity losses
  • Hedge funds are now up 0.56% for the month and 1.17% for the year
  • All but six of the 30 hedge fund strategies we track earned positive returns
  • We currently estimate that hedge funds returned 0.33% in June, 0.32% more than our initial projection of 0.01%
  • Commodities and foreign stocks struggled last week, but U.S. equities and bonds displayed continued strength
  • Most U.S. equity indexes rose, while most foreign equity indexes fell
  • Nearly all of our major bond indexes increased, with only short-term U.S. Treasuries losing value
  • Aside from precious metals, most major commodity sectors fell as oil plummeted 7.3%
  • Foreign currencies fell, but currency carry, momentum and value factors all recorded strong risk-adjusted returns
  • All of our U.S. short volatility and variance strategies rose for the second straight week
  • Trend following strategies produced mediocre results, but momentum strategies tended to fare well

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.27% last week as widespread factor gains overcame foreign equity losses
  • Hedge funds are now up 0.56% for the month and 1.17% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.29%), alpha (0.15%) and short volatility (0.09%)
  • It indicates negative weekly contributions from the spread between developed market equities and U.S. equities (-0.50%), oil beta (-0.04%) and agricultural commodity beta (-0.02%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.15%, 0.25% and 0.84%, respectively

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Strategy Performance

  • All but six of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (0.71%), Special Situations (0.67%) and Managed Futures (0.58%)
  • Laggards: Equity Short-Bias (-1.02%), Energy (-0.65%) and Commodities (-0.37%)
  • 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 (0.62%), Special Situations (0.60%) and Distressed Securities (0.40%)
  • Alpha laggards: Energy (-0.29%), Equity Short-Bias (-0.22%) and Latin America (-0.20%)

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Global Benchmarks

  • Commodities and foreign stocks struggled, but U.S. equities and bonds displayed continued strength
  • Leaders: U.S. risk parity (2.36%), U.S. consumer discretionary equity (2.22%) and U.S. healthcare equity (2.06%)
  • Laggards: oil futures (-7.30%), energy commodities (-7.08%) and commodities (-4.39%)
  • Equities: most U.S. equity indexes rose, while most foreign equity indexes fell
  • Bonds: nearly all of our major bond indexes increased, with only short-term U.S. Treasuries losing value
  • Real Estate: real estate securities gained in the U.S., but declined internationally
  • Commodities: aside from precious metals, most major commodity sectors fell as oil plummeted 7.3%
  • Currencies: both developed and emerging market currencies depreciated against the dollar
  • Multi-Asset: risk parity outperformed 60/40, but all of our balanced indexes notched gains

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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: 1-month developed market equity country momentum (2.88%), currency value (2.80%) and 1-year multi-asset class momentum (2.37%)
  • Laggards: the spread between developed market and U.S. equity (-3.29%), the spread between developed market and U.S. equity indexes (-3.04%) and commodity beta (-2.69%)
  • Commodity: trend following struggled, but momentum and term structure strategies rose
  • Credit: investment grade bonds outperformed Treasuries, but this was largely due to duration mismatches
  • Equity: size and value factors underperformed in developed markets once again
  • Fixed Income: term structure strategies posted positive returns in the both the U.S. and Europe
  • Foreign Exchange: foreign currencies fell, but carry, momentum and value factors all recorded strong risk-adjusted returns
  • Multi-Asset: momentum strategies earned healthy profits, but trend following gains were modest
  • Real Estate: real estate securities slightly underperformed small cap equities both in the U.S. and abroad
  • Risk: all of our U.S. short volatility and variance strategies rose for the second straight week
  • Momentum: trend following strategies produced mediocre results, but momentum strategies tended to fare well

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June 2016 Estimate Review

  • Most of the indexes underlying our composite indexes have reported June returns, but our analysis is still preliminary and subject to change
  • We currently estimate that hedge funds returned 0.33% in June, 0.32% more than our initial projection of 0.01%
  • As of this moment, we correctly predicted the direction of 24 of 30 strategies
  • We were within 25 basis points for 11 indexes and within 50 basis points for 18
  • Our hit rate was below average but our accuracy was about average
  • 17 strategies performed better than we anticipated; 13 performed worse
  • Most accurate: Global Macro (within 1 basis point), Merger Arbitrage (within 3 bps) and Credit (within 3 bps)
  • Least accurate: Commodities (3.15% better than expected), Latin America (2.16% better) and Special Situations (1.35% worse)
  • Overall, our estimates were 70% more accurate than naive forecasts of flat returns

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