EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: August 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 0.05% in August as alpha losses negated gains from equities
  • Hedge funds are now up 2.26% for the year
  • All but six of the 30 hedge fund strategies we track earned positive returns
  • Diversified portfolios produced muted returns despite large moves in commodities, REITs and defensive equity sectors
  • Equities surged in Emerging Asian markets, but earned modest returns elsewhere
  • Developed market government bonds finished down, but corporate securities rose
  • Alternative commodity strategies, such as momentum, trend following and term structure, declined significantly
  • Currency carry strategies gained but momentum strategies fell
  • All of our short volatility and variance factors rose, led by our VIX term structure strategy
  • Trend following and momentum strategies tended to produce losses both within and across asset classes
  • 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 0.05% in August as alpha losses negated gains from equities
  • Hedge funds are now up 2.26% for the year
  • Our factor attribution analysis suggests positive monthly contributions from equity sector beta (0.18%), liquidity factors (0.15%) and the spread between emerging market and developed market equities (0.15%)
  • It indicates negative monthly contributions from alpha (-0.41%), equity sector momentum (-0.07%) and agricultural commodity beta (-0.06%)
  • It estimates month-to-date and year-to-date alphas of -0.41% and -0.76%, respectively

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Strategy Performance

  • All but six of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (1.97%), Emerging Asia (1.44%) and Special Situations (1.38%)
  • Laggards: Managed Futures (-1.69%), Commodities (-1.04%) and Equity Short-Bias (-0.69%)
  • North American funds outperformed both Asian and European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Special Situations (0.62%), Merger Arbitrage (0.39%) and Healthcare (0.36%)
  • Alpha laggards: Asia (-0.94%), Managed Futures (-0.88%) and Emerging Asia (-0.85%)

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Global Benchmarks

  • Diversified portfolios produced muted returns despite large moves in commodities, REITs and defensive equity sectors
  • Leaders: energy commodities (6.02%), oil futures (5.63%) and emerging Asia equity (4.05%)
  • Laggards: U.S. telecommunications equity (-5.89%), U.S. utilities equity (-5.44%) and agricultural commodities (-5.36%)
  • Equities: equities surged in Emerging Asian markets, but earned modest returns elsewhere
  • Bonds: developed market government bonds finished down, but corporate securities rose
  • Real Estate: real estate securities declined worldwide, producing above-average losses in the U.S.
  • Commodities: commodities were down only slightly as energy gains offset large losses in other sectors
  • Currencies: developed market currencies depreciated against the dollar, but emerging market currencies appreciated
  • Multi-Asset: our multi-asset class benchmarks posted mixed results as 60/40 strategies generated small gains and risk parity strategies notched modest losses

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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: developed market equity value (5.39%), the spread between global and U.S. inflation-linked securities (5.17%) and VIX futures term structure (4.11%)
  • Laggards: the spread between U.S. telecommunications equity and the market (-5.73%), 1-month commodity momentum (-5.25%) and the spread between U.S. utilities equity and the market (-4.00%)
  • Commodity: alternative commodity strategies, such as momentum, trend following and term structure, declined significantly
  • Credit: investment grade bonds substantially outperformed government bonds and high yield performed even better
  • Equity: value factors earned large profits in developed markets even as defensive sectors tended to underperform broad indexes
  • Fixed Income: term structure strategies declined both in the U.S. and in Europe
  • Foreign Exchange: currency carry strategies gained but momentum strategies fell
  • Multi-Asset: multi-asset class trend following and medium-term momentum strategies earned negative returns
  • Real Estate: real estate securities substantially underperformed small cap equities both domestically and internationally
  • Risk: all of our short volatility and variance factors rose, led by our VIX term structure strategy
  • Momentum: trend following and momentum strategies tended to produce losses both within and across asset classes

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July 2016 Estimate Review

  • All of the indexes underlying our composite indexes have reported July returns
  • Hedge funds returned 1.59% in July, 0.02% more than our initial projection of 1.57%
  • We correctly predicted the direction of 29 of 30 strategies
  • We were within 25 basis points for 13 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: Hedge Funds (within 2 basis points), Multi-Strategy (within 5 bps) and Emerging Markets (within 6 bps)
  • Least accurate: Latin America (3.42% better than expected), Energy (0.89% worse) and Commodities (0.79% better)
  • Overall, our estimates were 89% more accurate than naive forecasts of flat returns

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