EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: August 15, 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 foreign equity strength fueled profits
  • Hedge funds are now up 0.53% for the month and 2.67% for the year
  • All but three of the 30 hedge fund strategies we track earned positive returns
  • Foreign equities and fixed income securities again led diversified portfolios to strong gains
  • U.S. equity returns were modest, but foreign equities generated healthy profits
  • Bonds extended their year-to-date rallies in most major markets
  • Commodities as a whole gained, but momentum, trend following and term structure strategies all notched heavy losses
  • Our currency value factor declined, but FX carry and momentum strategies were nearly flat
  • All of our short volatility and variance strategies rose, led by our global short equity variance factor
  • Trend following strategies tended to gain in most asset classes while medium-term momentum strategies tended to decline
  • We currently estimate that hedge funds returned 1.51% in July, 0.06% less than our initial projection of 1.57%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.39% last week as foreign equity strength fueled profits
  • Hedge funds are now up 0.53% for the month and 2.67% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and U.S. equities (0.47%), fixed income term structure (0.04%) and liquidity factors (0.03%)
  • It indicates negative weekly contributions from alpha (-0.09%), equity sector beta (-0.05%) and developed currencies (-0.02%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.09%, -0.19% and -0.56%, respectively

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Strategy Performance

  • All but three of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (1.47%), Emerging Asia (1.11%) and Latin America (1.05%)
  • Laggards: Equity Short-Bias (-0.27%), Healthcare (-0.18%) and Commodities (-0.11%)
  • 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: Managed Futures (0.78%), Global Macro (0.22%) and Healthcare (0.20%)
  • Alpha laggards: Emerging Markets (-0.27%), Asia (-0.25%) and Latin America (-0.23%)

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Global Benchmarks

  • Foreign equities and fixed income securities again led diversified portfolios to strong gains
  • Leaders: oil futures (6.23%), energy commodities (4.72%) and developed Asia-Pacific equity (3.45%)
  • Laggards: agricultural commodities (-1.20%), U.S. materials equity (-0.87%) and U.S. healthcare equity (-0.76%)
  • Equities: U.S. returns were modest, but foreign equities generated healthy profits
  • Bonds: bonds extended their year-to-date rallies in most major markets
  • Real Estate: REITs fell slightly in the U.S., but real estate securities globally gained due to overseas performance
  • Commodities: energy gains pushed our broad commodity index upwards, even as every other major sector declined
  • Currencies: both developed and emerging market currencies appreciated against the dollar
  • Multi-Asset: all of our multi-asset class benchmarks rose, but risk parity strategies materially 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 and U.S. inflation-linked securities (3.25%), the spread between developed market and U.S. equity (2.94%) and the spread between developed market and U.S. equity indexes (2.63%)
  • Laggards: 1-month commodity momentum (-3.47%), commodity term structure (-2.43%) and 1-year commodity momentum (-2.43%)
  • Commodity: momentum, trend following and term structure strategies all notched heavy losses
  • Credit: investment grade bonds again outperformed similar duration government bonds
  • Equity: size and value factors posted small losses as most equity factors produced muted returns
  • Fixed Income: term structure strategies shook off last week’s declines to extend year-to-date profits
  • Foreign Exchange: currency value declined meaningfully, but carry and momentum strategies were nearly flat
  • Multi-Asset: trend following and short-term momentum strategies each rose, but medium-term momentum fell
  • Real Estate: real estate securities matched small cap equities in the U.S., but trailed substantially overseas
  • Risk: all of our short volatility and variance strategies rose, led by our global short equity variance factor
  • Momentum: trend following strategies tended to gain in most asset classes while medium-term momentum strategies tended to decline

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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 1.51% in July, 0.06% 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 20 indexes and within 50 basis points for 25
  • Both our hit rate and our accuracy were above average
  • 18 strategies performed better than we anticipated; 12 performed worse
  • Most accurate: Convertible Arbitrage (within 1 basis point), Event Driven (within 4 bps) and Managed Futures (within 5 bps)
  • Least accurate: Energy (1.42% worse than expected), Latin America (1.25% better) and Equity Short-Bias (0.99% better)
  • Overall, our estimates were 94% more accurate than naive forecasts of flat returns

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