EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: August 1, 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 0.46% last week as foreign equity gains fueled profits
  • Hedge funds are now up 1.57% for the month and 2.22% for the year
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Strong government bond performance lifted balanced portfolios to healthy returns
  • U.S. equities were flat, but developed market stocks led global equities to gains
  • Real estate securities rose worldwide, but U.S. REITs underperformed foreign assets
  • Commodity betas declined, but alternative betas such as momentum and term structure profited
  • Developed market currencies appreciated against the dollar but emerging currencies depreciated
  • All of our short volatility and variance strategies rose
  • Trend following and momentum strategies tended to gain in non-equity asset classes
  • We currently estimate that hedge funds returned 0.33% in June, 0.32% more than our initial projection of 0.01%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.46% last week as foreign equity gains fueled profits
  • Hedge funds are now up 1.57% for the month and 2.22% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and U.S. equities (0.40%), short volatility (0.10%) and equity sector beta (0.08%)
  • It indicates negative weekly contributions from the spread between emerging market and developed market equities (-0.06%), high yield credit spreads (-0.06%) and alpha (-0.04%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.04%, 0.01% and 0.63%, respectively

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Managed Futures (1.06%), Healthcare (0.99%) and Asia (0.69%)
  • Laggards: Equity Short-Bias (-0.52%), Latin America (-0.27%) and Merger Arbitrage (0.10%)
  • North American funds trailed 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 (0.22%), Managed Futures (0.22%) and Convertible Arbitrage (0.20%)
  • Alpha laggards: Equity Growth (-0.29%), Healthcare (-0.27%) and Special Situations (-0.21%)

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Global Benchmarks

  • Strong government bond performance lifted balanced portfolios to healthy returns
  • Leaders: global risk parity (2.89%), developed Asia-Pacific equity (2.85%) and developed ex-U.S. government bonds (2.82%)
  • Laggards: oil futures (-5.86%), energy commodities (-4.64%) and U.S. energy equity (-1.97%)
  • Equities: U.S. equities were flat, but developed market stocks led global equities to gains
  • Bonds: bonds produced sharp risk-adjusted gains, particularly among developed market government securities
  • Real Estate: real estate securities rose worldwide, but U.S. REITs underperformed foreign assets
  • Commodities: oil price declines led our broad commodity index downward
  • Currencies: developed market currencies appreciated against the dollar but emerging currencies depreciated
  • Multi-Asset: all of our multi-asset class benchmarks gained, but risk parity strongly outperformed 60/40

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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 global global and U.S. aggregate bonds (3.39%), the spread between developed market and U.S. government bonds (3.12%) and the spread between global and U.S. inflation-linked securities (2.81%)
  • Laggards: the spread between emerging market and U.S. government bonds (-2.99%), 1-month developed market equity sector momentum (-2.69%) and the spread between emerging market and global aggregate bonds (-2.24%)
  • Commodity: commodity betas declined, but alternative betas such as momentum and term structure profited
  • Credit: corporate bonds underperformed government bonds worldwide
  • Equity: small caps outgained large caps globally while value stocks underperformed growth stocks domestically
  • Fixed Income: government bond term structure strategies notched meaningful gains in both the U.S. and Europe
  • Foreign Exchange: carry strategies fell along with emerging market currencies, but momentum and value strategies rose
  • Multi-Asset: trend following and medium-term momentum strategies earned modest profits
  • Real Estate: real estate securities outperformed small cap equities in the U.S., but lagged overseas
  • Risk: all of our short volatility and variance strategies rose, led by our short VIX futures factor
  • Momentum: trend following and momentum strategies tended to gain in non-equity asset classes

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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 0.33% in June, 0.32% more than our initial projection of 0.01%
  • As of this moment, we correctly predicted the direction of 22 of 30 strategies
  • We were within 25 basis points for 13 indexes and within 50 basis points for 18
  • Our hit rate was below average but our accuracy was about average
  • 16 strategies performed better than we anticipated; 14 performed worse
  • Most accurate: Equity Long/Short (within 1 basis point), Relative Value (within 1 bp) and Equity Market Neutral (within 1 bp)
  • Least accurate: Latin America (3.59% better than expected), Emerging Europe (2.18% better) and Healthcare (1.52% worse)
  • Overall, our estimates were 68% more accurate than naive forecasts of flat returns

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