EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: September 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 projections estimate that hedge funds added 0.64% in September as foreign equity strength overcame negative alpha
  • Hedge funds are now up 3.35% for the year
  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Most asset classes posted gains, but intra-asset class performance was mixed, particularly in fixed income and U.S. equities
  • Equities gained only modestly in the U.S., but performed well overseas
  • Foreign developed market government bonds and U.S. corporate bonds pushed global bond indexes upwards
  • Most alternative commodity factors gained, including term structure, trend following and medium-term momentum
  • Currency carry and momentum factors rose, but value underperformed
  • Our short volatility and variance factors generated mixed, but relatively muted results
  • Trend following and momentum performance varied by asset class, but was generally positive
  • 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 0.64% in September as foreign equity strength overcame negative alpha
  • Hedge funds are now up 3.35% for the year
  • Our factor attribution analysis suggests positive monthly contributions from the spread between developed market equities and U.S. equities (0.23%), commodity momentum (0.17%) and equity size (0.11%)
  • It indicates negative monthly contributions from alpha (-0.27%), currency value (-0.02%) and the spread between developed market and U.S. short volatility (-0.02%)
  • It estimates month-to-date and year-to-date alphas of -0.27% and -0.05%, respectively

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Strategy Performance

  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Asia (2.28%), Emerging Europe (2.03%) and Energy (1.74%)
  • Laggards: Equity Short-Bias (-0.55%), Latin America (-0.12%) and Europe (-0.11%)
  • North American funds trailed both Asian and European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Emerging Asia (0.31%), Equity Value (0.30%) and Technology (0.27%)
  • Alpha laggards: Europe (-1.09%), Distressed Securities (-0.65%) and Healthcare (-0.63%)

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Global Benchmarks

  • Most asset classes posted gains, but intra-asset class performance was mixed, particularly in fixed income and U.S. equities
  • Leaders: oil futures (6.58%), energy commodities (5.94%) and base metals (5.14%)
  • Laggards: U.S. financials equity (-2.00%), U.S. REITs (-1.90%) and U.S. consumer staples equity (-1.57%)
  • Equities: equities gained only modestly in the U.S., but performed well overseas
  • Bonds: foreign developed market government bonds and U.S. corporate bonds pushed global bond indexes upwards
  • Real Estate: poor U.S. REIT performance led global real estate indexes to declines
  • Commodities: precious metals underperformed, but every major commodity sector earned positive returns
  • Currencies: developed market currencies appreciated modestly against the dollar while emerging market currencies depreciated
  • Multi-Asset: global portfolios outperformed U.S.-only portfolios; risk parity outperformed 60/40 globally but not domestically

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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 (2.99%), developed market equity size (2.92%) and the spread between emerging market high yield and investment grade credit (2.75%)
  • Laggards: the spread between developed market real estate securities and small cap equities (-2.79%), the spread between U.S. financials equity and the market (-2.38%) and the spread between U.S. consumer staples equity and the market (-1.82%)
  • Commodity: most alternative commodity factors gained, including term structure, trend following and medium-term momentum
  • Credit: credit risk generally underperformed, except in emerging markets
  • Equity: size and value factors rose in the U.S., but equity factor performance varied by region
  • Fixed Income: term structure strategies gained in Europe, but tended to produce losses in the U.S.
  • Foreign Exchange: currency carry and momentum factors rose, but value underperformed
  • Multi-Asset: Our multi-asset class trend following and momentum strategies produced mixed results as medium-term momentum underwhelmed
  • Real Estate: real estate securities substantially underperformed small cap equities worldwide
  • Risk: our short volatility and variance factors generated mixed, but relatively muted results
  • 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
  • Hedge funds returned 0.46% in August, 0.41% more than our initial projection of 0.05%
  • 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 5 bps) and Relative Value (within 9 bps)
  • Least accurate: Energy (3.65% better than expected), Healthcare (1.81% better) and Emerging Asia (1.30% better)
  • Overall, our projections were 60% more accurate than naive forecasts of flat returns

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