EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: July 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 1.57% in July as global equity gains fueled profits
  • Hedge funds are now up 2.22% for the year
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Although fixed income returns were modest, rising equities lifted diversified portfolios to healthy returns
  • Equities had a strong month worldwide, but international stocks outpaced U.S. stocks
  • Real estate securities trailed small caps, but gained in excess of 4% both domestically and abroad
  • Commodity betas declined, but momentum and term structure strategies enjoyed large profits
  • Currency factor returns were very modest in both developed and emerging markets
  • All of our short volatility and variance strategies rose, led by our VIX term structure factor
  • Trend following and momentum strategies underperformed among equities, but gained elsewhere
  • 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 1.57% in July as global equity gains fueled profits
  • Hedge funds are now up 2.22% for the year
  • Our factor attribution analysis suggests positive monthly contributions from equity beta (0.93%), equity sector beta (0.38%) and the spread between developed market equities and U.S. equities (0.21%)
  • It indicates negative monthly contributions from alpha (-0.16%), agricultural commodity beta (-0.08%) and equity region beta (-0.07%)
  • It estimates month-to-date and year-to-date alphas of -0.16% and 0.13%, respectively

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (3.26%), Equity Long Only (3.00%) and Emerging Asia (2.81%)
  • Laggards: Equity Short-Bias (-2.71%), Commodities (-0.16%) and Equity Market Neutral (0.41%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (1.55%), Convertible Arbitrage (0.56%) and Equity Market Neutral (0.40%)
  • Alpha laggards: Energy (-1.06%), Latin America (-1.02%) and Emerging Asia (-0.97%)

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Global Benchmarks

  • Although fixed income returns were modest, rising equities lifted diversified portfolios to healthy returns
  • Leaders: U.S. information technology equity (8.15%), developed Asia-Pacific equity (6.44%) and U.S. materials equity (5.73%)
  • Laggards: oil futures (-15.27%), energy commodities (-13.40%) and commodities (-7.50%)
  • Equities: equities had a strong month worldwide, but international stocks outpaced U.S. stocks
  • Bonds: government bonds enjoyed modest profits, but lagged corporate bonds
  • Real Estate: real estate securities posted aggregate returns in excess of 4% both domestically and abroad
  • Commodities: heavy losses in the energy and agricultural sectors pushed broad commodity indexes downward
  • Currencies: developed market currencies appreciated modestly against the dollar but emerging currencies depreciated
  • Multi-Asset: all of our multi-asset class benchmarks notched returns of at least 2.6%

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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 commodity momentum (6.83%), 1-year commodity sector momentum (6.22%) and 1-month commodity sector momentum (5.96%)
  • Laggards: 1-month developed market equity sector momentum (-5.19%), oil futures (-4.94%) and 1-year U.S. equity momentum (-4.81%)
  • Commodity: commodity betas declined, but momentum and term structure strategies enjoyed large profits
  • Credit: investment grade bonds materially outperformed similar duration government bonds
  • Equity: size and value factors gained, but momentum and trend following strategies suffered sizeable losses
  • Fixed Income: European term structure earned nearly 2% on a risk-adjusted basis
  • Foreign Exchange: currency factor returns were very modest in both developed and emerging markets
  • Multi-Asset: trend following and medium-term momentum strategies gained 1.4% and 1.9%, respectively
  • Real Estate: real estate securities underperformed small cap equities both in the U.S. and overseas
  • Risk: all of our short volatility and variance strategies rose, led by our VIX term structure factor
  • Momentum: trend following and momentum strategies underperformed among equities, but gained elsewhere

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June 2016 Estimate Review

  • All of the indexes underlying our composite indexes have reported June returns
  • Hedge funds returned 0.33% in June, 0.32% more than our initial projection of 0.01%
  • 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: Relative Value (within 1 basis point), Equity Long/Short (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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