EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: July 25, 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 0.15% last week as U.S. equity gains overcome foreign equity losses
  • Hedge funds are now up 1.05% for the month and 1.71% for the year
  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Equities posted modest gains, but losses in commodities and foreign bonds limited diversified portfolio performance
  • Most equity sectors and regions worldwide earned positive returns
  • U.S. bonds rebounded from last week’s losses, and corporate credit modestly outperformed
  • Commodity betas declined, but alternative betas such as momentum and term structure profited
  • All of our major currency factors declined, with carry and momentum posting the largest losses
  • All of our short volatility and variance strategies rose
  • Trend following returns were mixed, but muted
  • We currently estimate that hedge funds returned 0.35% in June, 0.34% more than our initial projection of 0.01%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.15% last week as U.S. equity gains overcome foreign equity losses
  • Hedge funds are now up 1.05% for the month and 1.71% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.14%), short volatility (0.06%) and multi-asset class momentum (0.05%)
  • It indicates negative weekly contributions from the spread between developed market equities and U.S. equities (-0.12%), equity region beta (-0.07%) and currency momentum (-0.04%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.02%, 0.01% and 0.64%, respectively

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Strategy Performance

  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (0.72%), Emerging Asia (0.65%) and Technology (0.59%)
  • Laggards: Emerging Europe (-1.76%), Equity Short-Bias (-0.74%) and Commodities (-0.40%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Convertible Arbitrage (0.20%), Fixed Income Arbitrage (0.15%) and Equity Long Only (0.14%)
  • Alpha laggards: Managed Futures (-0.38%), Energy (-0.04%) and Commodities (-0.03%)

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Global Benchmarks

  • Equities posted modest gains, but losses in commodities and foreign bonds limited diversified portfolio performance
  • Leaders: U.S. information technology equity (1.99%), U.S. REITs (1.83%) and Latin America equity (1.66%)
  • Laggards: oil futures (-5.27%), energy commodities (-4.19%) and agricultural commodities (-3.14%)
  • Equities: most sectors and regions worldwide earned positive returns
  • Bonds: U.S. bonds rebounded from last week’s losses, but foreign government bonds struggled
  • Real Estate: real estate securities rose both domestically and internationally
  • Commodities: all of the major commodity sectors fell, but agricultural commodities notched the worst risk-adjusted losses
  • Currencies: both developed and emerging market currencies depreciated against the dollar
  • Multi-Asset: U.S.-centric portfolios outperformed global portfolios as foreign bond losses crippled returns

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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. information technology equity and the market (1.78%), VIX futures term structure (1.61%) and the spread between U.S. listed private equity and small cap equity (1.39%)
  • Laggards: the spread between European and emerging market equity (-3.10%), the spread between U.S. industrials equity and the market (-1.93%) and commodity beta (-1.81%)
  • Commodity: commodity betas declined, but alternative betas such as momentum and term structure profited
  • Credit: corporate bonds modestly outperformed government bonds globally
  • Equity: value underperformed growth while small caps outperformed large caps
  • Fixed Income: although foreign government bonds fell, term structure strategies actually rose
  • Foreign Exchange: all of our major currency factors declined, with carry and momentum posting the largest losses
  • Multi-Asset: trend following was flat, but momentum strategies earned positive returns
  • Real Estate: real estate securities materially outperformed small cap equities both in the U.S. and abroad
  • Risk: all of our short volatility and variance strategies rose, led by our VIX term structure factor
  • Momentum: trend following returns were mixed, but muted; medium-term momentum returns were mostly positive

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June 2016 Estimate Review

  • All 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 0.35% in June, 0.34% more than our initial projection of 0.01%
  • As of this moment, we correctly predicted the direction of 23 of 30 strategies
  • We were within 25 basis points for 15 indexes and within 50 basis points for 17
  • Our hit rate was below average but our accuracy was about average
  • 17 strategies performed better than we anticipated; 11 performed worse
  • Most accurate: Relative Value (exact), Global Macro (exact) and Asia (within 4 basis points)
  • Least accurate: Latin America (3.59% better than expected), Emerging Europe (2.18% better) and Healthcare (1.51% worse)
  • Overall, our estimates were 69% more accurate than naive forecasts of flat returns

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