EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: October 10, 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 0.03% last week as gains from high yield offset equity losses
  • Hedge funds are now up 0.03% for the month and 3.35% for the year
  • 23 of the 30 hedge fund strategies we track earned positive returns
  • Most asset classes posted losses, as only emerging equities, US high yield and energy commodities managed to profit
  • Equities declined in developed markets, with defensive sectors taking the largest hits
  • Government bonds struggled both in the US and abroad
  • Most alternative commodity factors declined, including term structure, trend following and medium-term momentum
  • Currency carry strategies rose, but momentum and value factors declined
  • Most of our short volatility and variance factors rose, but performance was muted
  • Trend following and momentum strategies tended to gain among equities, but fall elsewhere
  • We currently estimate that hedge funds returned 0.64% in September, which is equal to our initial projection

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.03% last week as gains from high yield offset equity losses
  • Hedge funds are now up 0.03% for the month and 3.35% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between emerging market and developed market equities (0.12%), high yield credit spreads (0.09%) and the spread between MLPs and REITs (0.06%)
  • It indicates negative weekly contributions from equity beta (-0.17%), fixed income term structure (-0.07%) and gold beta (-0.07%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.04%, 0.04% and -0.15%, respectively

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Strategy Performance

  • 23 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (0.87%), Emerging Europe (0.59%) and Emerging Markets (0.50%)
  • Laggards: Managed Futures (-0.85%), Commodities (-0.45%) and Energy (-0.31%)
  • North American funds trailed both Asian and European funds
  • The spread between emerging market and developed market equities was the most significant factor driving strategy returns
  • Alpha leaders: North America (0.21%), Equity Value (0.19%) and Event Driven (0.19%)
  • Alpha laggards: Latin America (-0.36%), Managed Futures (-0.22%) and Emerging Asia (-0.20%)

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Global Benchmarks

  • Most asset classes posted losses, as only emerging equities, US high yield and energy commodities managed to profit
  • Leaders: energy commodities (3.79%), oil futures (3.26%) and Latin America equity (3.15%)
  • Laggards: precious metals (-5.76%), U.S. REITs (-5.24%) and gold futures (-4.95%)
  • Equities: equities declined in developed markets, with defensive sectors taking the largest hits
  • Bonds: US high yield eked out gains, but government bonds struggled both in the US and abroad
  • Real Estate: real estate securities suffered large declines globally
  • Commodities: gold and other precious metals plummeted, but energy strength led our broad commodities index upward
  • Currencies: both developed and emerging market currencies depreciated against the dollar
  • Multi-Asset: risk parity portfolios substantially underperformed 60/40 due to leveraged bond 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: U.S. equity value (2.89%), the spread between U.S. mortgage-backed securities and U.S. Treasuries (2.80%) and the spread between emerging and developed market equity indexes (2.69%)
  • Laggards: the spread between developed market real estate securities and equities (-3.44%), the spread between developed market real estate securities and small cap equities (-3.18%) and the spread between U.S. REITs and equities (-3.14%)
  • Commodity: most alternative factors declined, including term structure, trend following and medium-term momentum
  • Credit: investment grade bonds modestly outperformed government bonds, particularly at longer maturities
  • Equity: value and large cap equities tended to outperform growth and small cap stocks, respectively
  • Fixed Income: term structure strategies posted losses both in the US and in Europe
  • Foreign Exchange: currency carry strategies rose, but momentum and value factors declined
  • Multi-Asset: multi-asset class trend following and medium-term momentum strategies produced meaningful losses
  • Real Estate: real estate securities substantially underperformed small cap equities worldwide
  • Risk: most of our short volatility and variance factors rose, but performance was muted
  • Momentum: trend following and momentum strategies tended to gain among equities, but fall elsewhere

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September 2016 Projection Review

  • Most of the indexes underlying our composite indexes have reported September returns, but our analysis is still preliminary and subject to change
  • We currently estimate that hedge funds returned 0.64% in September, which is equal to our initial projection
  • 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 23
  • Our hit rate was about average but our accuracy was above average
  • 15 strategies performed better than we anticipated; 14 performed worse
  • Most accurate: Hedge Funds (exact), Equity Long/Short (within 3 basis points) and Emerging Europe (within 6 bps)
  • Least accurate: Healthcare (5.45% better than expected), Technology (2.69% better) and Energy (0.79% worse)
  • Overall, our projections were 33% more accurate than naive forecasts of flat returns

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