EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: August 8, 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. and emerging market equity gains offset developed market equity losses
  • Hedge funds are now up 0.15% for the month and 2.27% for the year
  • All but six of the 30 hedge fund strategies we track earned positive returns
  • Global equities and bonds both posted losses, leading balanced portfolios to declines
  • Equity losses were concentrated in foreign developed markets
  • U.S. bonds fell, with the largest losses coming from longer-dated Treasuries and inflation-linked securities
  • Our broad commodities index finished down modestly as energy gains helped to offset losses in base and precious metals
  • Currency carry and momentum factors each gained more than 1%, risk-adjusted
  • All of our short volatility and variance strategies rose, led by our VIX term structure factor
  • Trend following and momentum strategies tended to decline in most asset classes
  • We currently estimate that hedge funds returned 1.49% in July, 0.08% less than our initial projection of 1.57%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.15% last week as U.S. and emerging market equity gains offset developed market equity losses
  • Hedge funds are now up 0.15% for the month and 2.27% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between emerging market and developed market equities (0.16%), equity beta (0.11%) and equity sector beta (0.08%)
  • It indicates negative weekly contributions from the spread between developed market equities and U.S. equities (-0.30%), alpha (-0.08%) and fixed income term structure (-0.02%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.08%, -0.08% and -0.47%, respectively

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Strategy Performance

  • All but six of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (0.82%), Emerging Asia (0.74%) and Distressed Securities (0.54%)
  • Laggards: Equity Short-Bias (-0.70%), Managed Futures (-0.37%) and Commodities (-0.28%)
  • 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: Healthcare (0.50%), Event Driven (0.22%) and Convertible Arbitrage (0.21%)
  • Alpha laggards: Emerging Asia (-0.36%), Managed Futures (-0.27%) and Emerging Markets (-0.25%)

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Global Benchmarks

  • Global equities and bonds both posted losses, leading balanced portfolios to declines
  • Leaders: U.S. information technology equity (1.71%), emerging Asia equity (1.68%) and emerging market equity (1.45%)
  • Laggards: U.S. utilities equity (-2.55%), U.S. REITs (-2.05%) and U.S. telecommunications equity (-1.82%)
  • Equities: equities were down globally, due mostly to losses in foreign developed markets
  • Bonds: U.S. bonds fell, with the largest losses coming from longer-dated Treasuries and inflation-linked securities
  • Real Estate: real estate securities declined worldwide, but U.S. REITs suffered the largest declines
  • Commodities: our broad commodities index finished down modestly as energy gains helped to offset losses in base and precious metals
  • Currencies: developed market currencies depreciated modestly against the dollar
  • Multi-Asset: most of our multi-asset class benchmarks fell and risk parity underperformed 60/40 both domestically and internationally

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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 (2.99%), the spread between emerging and developed market equity (2.86%) and the spread between emerging and developed market equity indexes (2.22%)
  • Laggards: the spread between 10-year and 5-year U.S. Treasuries (-2.78%), the spread between U.S. telecommunications equity and the market (-2.12%) and the spread between U.S. utilities equity and the market (-2.11%)
  • Commodity: term structure strategies rose, but trend following and momentum factors declined
  • Credit: investment grade bonds materially outperformed similar duration government bonds
  • Equity: size, value and momentum factors posted mixed performance while U.S. telecom and utility stocks underperformed the broader market
  • Fixed Income: U.S. Treasury term structure strategies declined significantly on a risk-adjusted basis
  • Foreign Exchange: currency carry and momentum factors each gained more than 1%, risk-adjusted
  • Multi-Asset: trend following and medium-term momentum strategies each lost value
  • Real Estate: real estate securities substantially underperformed small cap equities in the U.S., but led overseas
  • Risk: all of our short volatility and variance strategies rose, led by our VIX term structure factor
  • Momentum: trend following and momentum strategies tended to decline in most asset classes

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July 2016 Estimate Review

  • Most of the indexes underlying our composite indexes have reported July returns, but our analysis is still preliminary and subject to change
  • We currently estimate that hedge funds returned 1.49% in July, 0.08% less than our initial projection of 1.57%
  • As of this moment, we correctly predicted the direction of 29 of 30 strategies
  • We were within 25 basis points for 16 indexes and within 50 basis points for 24
  • Both our hit rate and our accuracy were above average
  • 17 strategies performed better than we anticipated; 13 performed worse
  • Most accurate: Fixed Income Arbitrage (within 2 basis points), Multi-Strategy (within 3 bps) and North America (within 6 bps)
  • Least accurate: Energy (1.54% worse than expected), Latin America (1.21% better) and Equity Short-Bias (0.93% better)
  • Overall, our estimates were 94% more accurate than naive forecasts of flat returns

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