EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: September 19, 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 0.17% last week as foreign equity losses overwhelmed gains from other factors
  • Hedge funds are now flat for the month and up 2.60% for the year
  • Only six of the 30 hedge fund strategies we track earned positive returns
  • Outside of U.S. equities, most asset classes produced losses last week
  • Equities rose in the U.S., but fell abroad leading to net negative global returns
  • Short-dated U.S. Treasuries eked out small gains, but most fixed income vehicles worldwide dropped
  • Energy and base metal losses led our broad commodity index to a negative return
  • Currency carry and value factors declined moderately as foreign currencies depreciated against the dollar
  • Most of our short volatility and variance factors rose, led by our U.S. put writing strategy
  • Trend following and momentum performance varied by asset class, but was generally negative
  • We currently estimate that hedge funds returned 0.37% in August, 0.32% more than our initial projection of 0.05%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.17% last week as foreign equity losses overwhelmed gains from other factors
  • Hedge funds are now flat for the month and up 2.60% for the year
  • Our factor attribution analysis suggests positive weekly contributions from alpha (0.14%), equity beta (0.12%) and equity size (0.05%)
  • It indicates negative weekly contributions from the spread between developed market equities and U.S. equities (-0.49%), the spread between MLPs and REITs (-0.07%) and gold beta (-0.03%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.14%, 0.02% and -0.24%, respectively

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Strategy Performance

  • Only six of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (0.55%), Technology (0.30%) and Equity Market Neutral (0.14%)
  • Laggards: Emerging Europe (-1.40%), Energy (-1.31%) and Latin America (-1.13%)
  • North American funds outperformed 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: Emerging Asia (0.62%), Asia (0.42%) and Equity Growth (0.25%)
  • Alpha laggards: Managed Futures (-0.39%), Global Macro (-0.13%) and Convertible Arbitrage (-0.10%)

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Global Benchmarks

  • Outside of U.S. equities, most asset classes produced losses last week
  • Leaders: U.S. information technology equity (3.00%), U.S. utilities equity (2.26%) and U.S. healthcare equity (1.52%)
  • Laggards: oil futures (-6.11%), U.S. MLPs (-3.92%) and energy commodities (-3.54%)
  • Equities: equities rose in the U.S., but fell abroad leading to net negative global returns
  • Bonds: short-dated U.S. Treasuries eked out small gains, but most fixed income vehicles worldwide dropped
  • Real Estate: real estate securities declined globally, but losses were especially pronounced abroad
  • Commodities: modest gains in base metals and agricultural commodities did little to offset losses in energy and precious metals
  • Currencies: both developed and emerging market currencies depreciated materially against the dollar
  • Multi-Asset: U.S.-centric portfolios avoided losses, but globally diversified portfolios were not so fortunate

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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 U.S. information technology equity and the market (3.17%), 1-year developed market equity country momentum (1.71%) and 1-year U.S. sector momentum (1.69%)
  • Laggards: developed market equity value (-3.28%), emerging market equity value (-3.08%) and the spread between developed market and U.S. equity indexes (-3.01%)
  • Commodity: medium-term momentum and term structure strategies rose as traditional betas fell
  • Credit: credit risk produced moderate losses in most regions
  • Equity: value factors declined while momentum factors rose and size factors produced mixed results
  • Fixed Income: term structure strategies notched modest losses both in the U.S. and Europe
  • Foreign Exchange: alternative currency factors such as carry and value declined moderately
  • Multi-Asset: all of our multi-asset class trend following and momentum strategies suffered losses
  • Real Estate: real estate securities underperformed small cap equities both domestically and internationally
  • Risk: most of our short volatility and variance factors rose, with our U.S. put writing strategy leading the way
  • Momentum: trend following and momentum performance varied by asset class, but was generally negative

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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 0.37% in August, 0.32% 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 10 indexes and within 50 basis points for 19
  • Both our hit rate and our accuracy were about average
  • 26 strategies performed better than we anticipated; four performed worse
  • Most accurate: Latin America (within 6 basis points), North America (within 7 bps) and Multi-Strategy (within 11 bps)
  • Least accurate: Energy (3.85% better than expected), Equity Short-Bias (1.30% worse) and Healthcare (0.93% better)
  • Overall, our projections were 59% more accurate than naive forecasts of flat returns

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