EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: August 22, 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 0.04% last week as muted factor performance limited returns
  • Hedge funds are now up 0.57% for the month and 2.80% for the year
  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Modest returns in most major asset classes led to muted performance in each of our multi-asset class portfolio benchmarks
  • Telecom stocks underperformed in the U.S., but most other equity sectors, styles and regions produced unremarkable returns
  • Bonds dipped in the U.S., but rose globally due to stronger overseas performance
  • Commodities gained, but momentum, trend following and term structure strategies again notched heavy losses
  • Currency carry and momentum strategies fell as the dollar underperformed foreign currencies
  • Nearly all of our short volatility and variance strategies rose, led by our VIX term structure factor
  • Trend following and momentum strategies tended to underperform in and across most asset classes
  • We currently estimate that hedge funds returned 1.59% in July, 0.02% more than our initial projection of 1.57%

Global Hedge Fund Performance

  • Our factor-based estimates project that hedge funds added 0.04% last week as muted factor performance limited returns
  • Hedge funds are now up 0.57% for the month and 2.80% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity sector beta (0.12%), the spread between MLPs and REITs (0.05%) and the spread between emerging market and developed market equities (0.04%)
  • It indicates negative weekly contributions from the spread between developed market equities and U.S. equities (-0.11%), multi-asset class momentum (-0.07%) and alpha (-0.04%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.04%, -0.22% and -0.51%, respectively

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Strategy Performance

  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Energy (1.06%), Special Situations (0.53%) and Emerging Europe (0.53%)
  • Laggards: Managed Futures (-0.62%), Global Macro (-0.11%) and Europe (-0.09%)
  • North American funds outperformed both Asian and European funds
  • Equity sector beta was the most significant factor driving strategy returns
  • Alpha leaders: Latin America (0.27%), Merger Arbitrage (0.24%) and Special Situations (0.23%)
  • Alpha laggards: Managed Futures (-0.29%), Emerging Asia (-0.21%) and Healthcare (-0.20%)

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Global Benchmarks

  • Modest returns in most major asset classes led to muted performance in each of our multi-asset class portfolio benchmarks
  • Leaders: oil futures (8.71%), energy commodities (7.89%) and commodities (3.74%)
  • Laggards: U.S. telecommunications equity (-3.71%), U.S. REITs (-1.76%) and global real estate (-1.24%)
  • Equities: telecom stocks underperformed in the U.S., but most other sectors, styles and regions produced unremarkable returns
  • Bonds: bonds dipped in the U.S., but rose globally due to stronger overseas performance
  • Real Estate: real estate securities fell both domestically and internationally
  • Commodities: energy gains once again propelled returns to our broad commodity index
  • Currencies: both developed and emerging market currencies appreciated against the dollar
  • Multi-Asset: 60/40 portfolios were essentially unchanged while global risk parity portfolios outperformed U.S.-centric portfolios

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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: oil futures (2.66%), commodity beta (2.28%) and VIX futures term structure (1.69%)
  • Laggards: 1-month commodity momentum (-3.72%), the spread between U.S. telecommunications equity and the market (-3.56%) and 1-year commodity momentum (-3.07%)
  • Commodity: momentum, trend following and term structure strategies again notched heavy losses
  • Credit: investment grade bonds outperformed similar duration government bonds for the third consecutive week
  • Equity: value factors returned to profitability, while size factors produced mixed results
  • Fixed Income: term structure strategies declined both in the U.S. and in Europe
  • Foreign Exchange: currency carry and momentum strategies fell while value strategies rose
  • Multi-Asset: all of our multi-asset class momentum and trend following strategies posted negative returns
  • Real Estate: real estate securities trailed small cap equities, substantially underperforming in the U.S.
  • Risk: nearly all of our short volatility and variance strategies rose, led by our VIX term structure factor
  • Momentum: trend following and momentum strategies tended to underperform in and across most asset classes

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July 2016 Estimate Review

  • All 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 1.59% in July, 0.02% more 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 15 indexes and within 50 basis points for 23
  • Both our hit rate and our accuracy were above average
  • 17 strategies performed better than we anticipated; 12 performed worse
  • Most accurate: Multi-Strategy (exact), Distressed Securities (within 2 basis points) and Hedge Funds (within 2 bps)
  • Least accurate: Latin America (3.42% better than expected), Energy (1.07% worse) and Equity Growth (0.74% better)
  • Overall, our estimates were 89% more accurate than naive forecasts of flat returns

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