EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: July 18, 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 0.39% last week as equity gains exceeded alpha losses
  • Hedge funds are now up 0.93% for the month and 1.44% for the year
  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Equities gained, but losses in U.S. fixed income depressed returns to multi-asset class portfolios
  • Nearly every one of our equity benchmarks rose, but foreign stocks outperformed U.S. equities
  • U.S. government and investment grade bonds declined substantially on a risk-adjusted basis
  • Commodities gained modestly, led by base metals
  • Foreign currencies rose, but carry, momentum and value factors all declined
  • Our buy write factor declined, but short volatility and variance strategies earned profits
  • Trend following strategies tended to gain, but momentum strategies declined in most asset classes
  • We currently estimate that hedge funds returned 0.24% in June, 0.23% more than our initial projection of 0.01%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.39% last week as equity gains exceeded alpha losses
  • Hedge funds are now up 0.93% for the month and 1.44% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.33%), the spread between developed market equities and U.S. equities (0.32%) and equity sector beta (0.11%)
  • It indicates negative weekly contributions from alpha (-0.19%), equity value (-0.10%) and equity sector momentum (-0.07%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.19%, 0.03% and 0.53%, respectively

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Strategy Performance

  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (1.97%), Emerging Asia (1.80%) and Emerging Markets (1.46%)
  • Laggards: Managed Futures (-0.92%), Equity Short-Bias (-0.85%) and Global Macro (-0.14%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (0.37%), Technology (0.18%) and Equity Market Neutral (0.09%)
  • Alpha laggards: Managed Futures (-0.53%), Emerging Europe (-0.50%) and Emerging Asia (-0.48%)

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Global Benchmarks

  • Equities gained, but losses in U.S. fixed income depressed returns to multi-asset class portfolios
  • Leaders: emerging EMEA equity (5.08%), emerging market equity (4.41%) and emerging Asia equity (4.34%)
  • Laggards: gold futures (-2.27%), U.S. 10-year Treasuries (-1.92%) and precious metals (-1.77%)
  • Equities: nearly every one of our equity benchmarks rose, with utilities the only loser
  • Bonds: U.S. government and investment grade bonds declined substantially on a risk-adjusted basis
  • Real Estate: real estate securities eked out positive returns domestically and strong returns internationally
  • Commodities: base metals surged, while precious metals lagged
  • Currencies: both developed and emerging market currencies appreciated against the dollar
  • Multi-Asset: risk parity strategies struggled due to large U.S. bond losses

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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. mortgage-backed securities and U.S. Treasuries (4.67%), developed market equity value (4.19%) and the spread between U.S. aggregate bonds and U.S. Treasuries (3.59%)
  • Laggards: currency value (-3.43%), U.S. Treasury bond term structure (-3.15%) and 1-year U.S. equity momentum (-2.75%)
  • Commodity: trend following, momentum and term structure strategies all rose
  • Credit: investment grade bonds materially outperformed Treasuries and high yield outclassed investment grade
  • Equity: value factors soared, but size and momentum factors posted large losses
  • Fixed Income: term structure strategies posted large negative returns in the both the U.S. and Europe
  • Foreign Exchange: foreign currencies rose, but carry, momentum and value factors all declined
  • Multi-Asset: momentum strategies notched large losses, but trend following eked out a small positive return
  • Real Estate: real estate securities underperformed small cap equities both in the U.S. and abroad
  • Risk: Our buy write factor declined, but short volatility and variance strategies earned profits
  • Momentum: trend following strategies tended to gain, but momentum strategies declined in most asset classes

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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 0.24% in June, 0.23% more than our initial projection of 0.01%
  • As of this moment, 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; 14 performed worse
  • Most accurate: Equity Long/Short (within 1 basis point), Technology (within 2 bps) and Equity Market Neutral (within 6 bps)
  • Least accurate: Latin America (1.63% better than expected), Healthcare (1.20% worse) and Europe (1.06% worse)
  • Overall, our estimates were 83% more accurate than naive forecasts of flat returns

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