EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: September 12, 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 projections estimate that hedge funds fell 0.16% last week as U.S. equity declines stifled returns
  • Hedge funds are now up 0.10% for the month and 2.58% for the year
  • Only eight of the 30 hedge fund strategies we track earned positive returns
  • Commodities rose last week, but most investors couldn’t escape losses as both stocks and bonds fell globally
  • Equities fell worldwide, but the U.S. bore the largest losses as most sectors declined
  • Bonds also declined globally, with the largest losses again in the United States
  • Energy gains helped propel our broad commodity index to a positive return
  • Currency momentum strategies rose while carry and value factors generated modest, mixed performance
  • Nearly all of our short volatility and variance factors fell, with our buy write index producing the largest loss
  • Trend following and momentum performance varied widely by asset class
  • We currently estimate that hedge funds returned 0.26% in August, 0.21% more than our initial projection of 0.05%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.16% last week as U.S. equity declines stifled returns
  • Hedge funds are now up 0.10% for the month and 2.58% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and U.S. equities (0.40%), the spread between MLPs and REITs (0.07%) and the spread between emerging market and developed market equities (0.07%)
  • It indicates negative weekly contributions from equity beta (-0.58%), alpha (-0.07%) and short volatility (-0.06%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.07%, -0.20% and -0.76%, respectively

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Strategy Performance

  • Only eight of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Equity Short-Bias (1.36%), Emerging Asia (0.75%) and Asia (0.53%)
  • Laggards: Latin America (-0.90%), Equity Long Only (-0.64%) and Technology (-0.61%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Managed Futures (0.29%), Global Macro (0.17%) and Latin America (0.11%)
  • Alpha laggards: Energy (-0.51%), Emerging Asia (-0.46%) and Distressed Securities (-0.33%)

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Global Benchmarks

  • Commodities rose last week, but most investors couldn’t escape losses as both stocks and bonds fell globally
  • Leaders: oil futures (3.23%), energy commodities (2.71%) and emerging Asia equity (1.90%)
  • Laggards: U.S. consumer staples equity (-3.88%), U.S. REITs (-3.86%) and U.S. materials equity (-3.59%)
  • Equities: equities fell worldwide, but the U.S. bore the largest losses as most sectors declined
  • Bonds: bonds also declined globally, with the largest losses again in the United States
  • Real Estate: real estate securities were nearly flat abroad, but REITs declined significantly domestically
  • Commodities: most commodity sectors gained, led by energy, which helped propel our broad commodity index to a positive return
  • Currencies: both developed and emerging market currencies appreciated modestly against the dollar
  • Multi-Asset: both 60/40 and risk parity strategies struggled, with U.S.-centric portfolios taking the heaviest hits

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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 developed market real estate securities and U.S. REITs (2.72%), the spread between developed market and U.S. equity (2.47%) and emerging market equity value (2.22%)
  • Laggards: the spread between Latin American and emerging market equity (-2.82%), S&P 500 buy writing (-1.97%) and S&P 500 put writing (-1.95%)
  • Commodity: momentum, trend following and term structure strategies all fell as broad market indexes rose
  • Credit: credit risk tended to produce moderate gains, both domestically and internationally
  • Equity: value factors earned profits while size and momentum factors produced mixed results
  • Fixed Income: term structure strategies fell both in the U.S. and Europe
  • Foreign Exchange: currency momentum strategies rose while carry and value factors generated modest, mixed performance
  • Multi-Asset: multi-asset class trend following and medium-term momentum strategies earned positive returns
  • Real Estate: real estate securities underperformed small cap equities domestically and internationally
  • Risk: nearly all of our short volatility and variance factors fell, with our buy write index producing the largest loss
  • Momentum: trend following and momentum performance varied widely by asset class

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August 2016 Projection Review

  • Most of the indexes underlying our composite indexes have reported August returns, but our analysis is still preliminary and subject to change
  • We currently estimate that hedge funds returned 0.26% in August, 0.21% more than our initial projection of 0.05%
  • As of this moment, we correctly predicted the direction of 27 of 30 strategies
  • We were within 25 basis points for 12 indexes and within 50 basis points for 21
  • Our hit rate was about average but our accuracy was above average
  • 21 strategies performed better than we anticipated; nine performed worse
  • Most accurate: Fixed Income Arbitrage (within 1 basis point), Multi-Strategy (within 4 bps) and Emerging Europe (within 7 bps)
  • Least accurate: Energy (2.35% better than expected), Healthcare (1.71% better) and Equity Long Only (1.19% better)
  • Overall, our projections were 70% more accurate than naive forecasts of flat returns

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