Hedge Funds Weekly: August 29, 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 fell 0.06% last week as declining U.S. equities hampered returns
- Hedge funds are now up 0.49% for the month and 2.71% for the year
- 12 of the 30 hedge fund strategies we track earned positive returns
- Most of our global benchmarks suffered modest declines as all major asset classes finished the week in the red
- U.S. financial stocks eked out a slight gain, but all other sectors posted losses
- Foreign corporate bonds showed a profit, but U.S. Treasuries struggled, particularly at shorter maturities
- Commodity momentum, trend following and term structure strategies rebounded from multiple weeks of losses
- Currency carry strategies generated healthy risk-adjusted returns
- All of our short volatility factors fell, but our short variance strategies rose, led by our short global equity variance factor
- Trend following and momentum strategies posted mixed, but relatively muted, performance
- 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 fell 0.06% last week as declining U.S. equities hampered returns
- Hedge funds are now up 0.49% for the month and 2.71% for the year
- Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and U.S. equities (0.12%), commodity momentum (0.03%) and liquidity factors (0.03%)
- It indicates negative weekly contributions from equity beta (-0.14%), the spread between emerging market and developed market equities (-0.06%) and agricultural commodity beta (-0.04%)
- It estimates weekly, month-to-date and year-to-date alphas of -0.03%, -0.26% and -0.16%, respectively
Strategy Performance
- 12 of the 30 hedge fund strategies we track earned positive returns
- Leaders: Fixed Income Arbitrage (0.08%), Special Situations (0.08%) and Technology (0.07%)
- Laggards: Energy (-0.85%), Latin America (-0.70%) and Managed Futures (-0.64%)
- North American funds trailed both Asian and European funds
- Equity beta was the most significant factor driving strategy returns
- Alpha leaders: Emerging Asia (0.19%), Equity Value (0.13%) and Technology (0.11%)
- Alpha laggards: Managed Futures (-0.66%), Emerging Europe (-0.29%) and Latin America (-0.24%)
Global Benchmarks
- Most of our global benchmarks suffered modest declines as all major asset classes finished the week in the red
- Leaders: developed Europe equity (0.69%), developed ex-U.S. high yield bonds (0.43%) and U.S. financials equity (0.42%)
- Laggards: agricultural commodities (-3.02%), oil futures (-2.99%) and base metals (-2.50%)
- Equities: U.S. financial stocks eked out a slight gain, but all other sectors posted losses
- Bonds: foreign corporate bonds showed a profit, but U.S Treasuries struggled, particularly at shorter maturities
- Real Estate: real estate securities fell domestically and were nearly flat internationally
- Commodities: commodities were the worst performing asset class as all major sectors fell
- Currencies: both developed and emerging market currencies depreciated against the dollar, with emerging currencies producing meaningful risk-adjusted losses
- Multi-Asset: all of our multi-asset class benchmarks finished the week down, with risk parity strategies underperforming 60/40
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%), commodity trend following (1.46%) and the spread between European and developed market equity (1.19%)
- Laggards: emerging market currencies (-1.72%), the spread between emerging and developed market equity indexes (-1.64%) and the spread between U.S. healthcare equity and the market (-1.16%)
- Commodity: momentum, trend following and term structure strategies rebounded from multiple weeks of losses
- Credit: investment grade bonds outperformed similar duration government bonds for the fourth consecutive week
- Equity: there was little consistency across regions among size, value and momentum factors
- Fixed Income: term structure strategies declined is the U.S., but rose in Europe
- Foreign Exchange: currency carry strategies generated healthy risk-adjusted returns
- Multi-Asset: our multi-asset class momentum factors produced gains, but our trend following strategies posted losses
- Real Estate: real estate securities trailed small caps on the U.S., but outperformed abroad
- Risk: all of our short volatility factors fell, but our short variance strategies rose, led by our short global equity variance factor
- Momentum: trend following and momentum strategies posted mixed, but relatively muted, performance
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 24
- Both our hit rate and our accuracy were above average
- 17 strategies performed better than we anticipated; 13 performed worse
- Most accurate: Relative Value (within 1 basis point), Hedge Funds (within 2 bps) and Multi-Strategy (within 4 bps)
- Least accurate: Latin America (3.42% better than expected), Energy (1.05% worse) and Equity Growth (0.74% better)
- Overall, our estimates were 89% more accurate than naive forecasts of flat returns
