EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: September 26, 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 added 0.65% last week as worldwide equity strength lifted returns
  • Hedge funds are now up 0.65% for the month and 3.36% for the year
  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Every one of our global benchmarks gained last week as risk was well-rewarded in all major asset classes
  • Equities rose in all sectors and regions, but gains were more pronounced in foreign markets
  • In fixed income markets, foreign government bonds outperformed in absolute return, while U.S. inflation-linked bonds led in risk-adjusted return
  • Most alternative commodity factors gained, including term structure, trend following and medium-term momentum
  • Currency carry and momentum factors rose as foreign currencies appreciated against the dollar
  • All of our short volatility and variance factors rose, with our short VIX futures strategy leading the way
  • Trend following and momentum performance varied by asset class, but was generally positive
  • We currently estimate that hedge funds returned 0.46% in August, 0.41% more than our initial projection of 0.05%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.65% last week as worldwide equity strength lifted returns
  • Hedge funds are now up 0.65% for the month and 3.36% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.32%), the spread between developed market equities and U.S. equities (0.29%) and currency momentum (0.07%)
  • It indicates negative weekly contributions from alpha (-0.27%), equity size (-0.02%) and developed currencies (-0.01%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.27%, -0.27% and -0.44%, respectively

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Strategy Performance

  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (2.01%), Emerging Asia (1.65%) and Managed Futures (1.44%)
  • Laggards: Equity Short-Bias (-0.53%), Merger Arbitrage (0.10%) and Equity Market Neutral (0.27%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (0.65%), Managed Futures (0.57%) and Global Macro (0.09%)
  • Alpha laggards: Latin America (-0.53%), Healthcare (-0.51%) and Emerging Markets (-0.46%)

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Global Benchmarks

  • Every one of our global benchmarks gained last week as risk was well-rewarded in all major asset classes
  • Leaders: U.S. MLPs (4.33%), U.S. REITs (4.21%) and Latin America equity (4.18%)
  • Laggards: cash (0.01%), U.S. 1-3-year Treasuries (0.04%) and U.S. energy equity (0.19%)
  • Equities: equities rose in all sectors and regions, but gains were more pronounced in foreign markets
  • Bonds: foreign government bonds led in absolute return, while U.S. inflation-linked bonds led in risk-adjusted return
  • Real Estate: real estate securities rose worldwide with particularly sharp returns in the U.S.
  • Commodities: all major commodity sectors earned positive returns, with precious metals leading the way
  • Currencies: both developed and emerging market currencies appreciated against the dollar
  • Multi-Asset: global portfolios outperformed U.S.-only portfolios and risk parity outperformed 60/40

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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: multi-asset class trend following (2.31%), the spread between U.S. inflation-linked bonds and U.S. Treasuries (2.25%) and the spread between U.S. 10-year and 5-year investment grade bonds (2.14%)
  • Laggards: the spread between U.S. mortgage-backed securities and U.S. Treasuries (-1.31%), 1-month U.S. sector momentum (-1.15%) and 1-month commodity momentum (-1.12%)
  • Commodity: most alternative commodity factors gained, including term structure, trend following and medium-term momentum
  • Credit: corporate bonds modestly outperformed government bonds after adjusting for duration
  • Equity: equity factor performance varied widely by region, but strong beta performance lifted equities worldwide
  • Fixed Income: term structure strategies gained both in the U.S. and Europe
  • Foreign Exchange: currency carry and momentum factors rose, but value underperformed
  • Multi-Asset: Our multi-asset class trend following and medium-term momentum strategies both produced healthy gains
  • Real Estate: real estate securities outperformed small cap equities domestically but underperformed internationally
  • Risk: all of our short volatility and variance factors rose, with our short VIX futures strategy leading the way
  • Momentum: trend following and momentum performance varied by asset class, but was generally positive

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August 2016 Projection Review

  • All 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 0.46% in August, 0.41% 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 six indexes and within 50 basis points for 14
  • Our hit rate was about average but our accuracy was below average
  • 26 strategies performed better than we anticipated; four performed worse
  • Most accurate: Multi-Strategy (within 3 basis points), North America (within 6 bps) and Relative Value (within 9 bps)
  • Least accurate: Energy (3.63% better than expected), Emerging Asia (1.30% better) and Equity Short-Bias (1.22% worse)
  • Overall, our projections were 62% more accurate than naive forecasts of flat returns

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