EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: October 17, 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 0.31% last week as global equity declines fueled losses
  • Hedge funds are now down 0.27% for the month and up 3.06% for the year
  • Only six of the 30 hedge fund strategies we track earned positive returns
  • Commodities eked out minor gains, but most asset classes declined amid global security weakness
  • Equities fell in all major regions and across most sectors
  • Bonds fell globally, but losses were most pronounced in developed foreign markets
  • Alternative commodity factors posted mixed, but mostly negative performance
  • Currency carry strategies rallied, while momentum and value factors earned modest profits
  • Most of our short volatility and variance factors fell, but performance was muted
  • Trend following and momentum strategies tended to decline both within and across asset classes
  • We currently estimate that hedge funds returned 0.65% in September, 0.01% more than our initial projection of 0.64%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.31% last week as global equity declines fueled losses
  • Hedge funds are now down 0.27% for the month and up 3.06% for the year
  • Our factor attribution analysis suggests positive weekly contributions from alpha (0.11%), high yield credit spreads (0.06%) and agricultural commodity beta (0.03%)
  • It indicates negative weekly contributions from equity beta (-0.25%), equity sector beta (-0.07%) and equity region beta (-0.05%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.11%, 0.15% and -0.02%, respectively

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Strategy Performance

  • Only six of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Equity Short-Bias (0.48%), Latin America (0.43%) and Distressed Securities (0.11%)
  • Laggards: Emerging Asia (-1.21%), Healthcare (-1.07%) and Energy (-0.74%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Emerging Asia (0.43%), Healthcare (0.41%) and Equity Value (0.28%)
  • Alpha laggards: Managed Futures (-0.62%), Equity Short-Bias (-0.44%) and Latin America (-0.29%)

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Global Benchmarks

  • Commodities eked out minor gains, but most asset classes declined amid global security weakness
  • Leaders: agricultural commodities (2.55%), Latin America equity (1.69%) and U.S. utilities equity (1.40%)
  • Laggards: U.S. healthcare equity (-3.30%), emerging EMEA equity (-2.87%) and emerging Asia equity (-2.23%)
  • Equities: equities fell in all major regions and across most sectors
  • Bonds: bonds fell globally, but losses were most pronounced in developed foreign markets
  • Real Estate: real estate securities declined overseas but rose in the US
  • Commodities: base metals suffered losses, but energy gains led our broad commodity index to a profit
  • Currencies: both developed and emerging market currencies depreciated against the dollar
  • Multi-Asset: 60/40 outperformed risk parity portfolios but all of our multi-asset class benchmarks struggled

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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 Latin American and emerging market equity (2.64%), currency carry (1.92%) and the spread between U.S. REITs and small cap equities (1.85%)
  • Laggards: the spread between global and U.S. inflation-linked securities (-3.87%), the spread between U.S. healthcare equity and the market (-2.48%) and the spread between global and U.S. aggregate bonds (-1.81%)
  • Commodity: alternative factors posted mixed, but mostly negative performance as term structure and medium-term momentum factors declined
  • Credit: investment grade bonds modestly outperformed government bonds, particularly at longer maturities
  • Equity: US single stock momentum gained materially, but size and value factors produced mixed results
  • Fixed Income: term structure strategies posted losses both in the US and in Europe
  • Foreign Exchange: currency carry strategies rallied, while momentum and value factors earned modest profits
  • Multi-Asset: multi-asset class trend following and momentum strategies produced modest, mostly negative returns
  • Real Estate: real estate securities outperformed small cap equities in the US, but trailed globally
  • Risk: most of our short volatility and variance factors fell, but performance was muted
  • Momentum: trend following and momentum strategies tended to decline both within and across asset classes

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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 0.65% in September, 0.01% more than our initial projection of 0.64%
  • As of this moment, we correctly predicted the direction of 27 of 30 strategies
  • We were within 25 basis points for 18 indexes and within 50 basis points for 24
  • Our hit rate was about average but our accuracy was above average
  • 18 strategies performed better than we anticipated; 12 performed worse
  • Most accurate: Fund of Funds (within 1 basis point), Hedge Funds (within 1 bp) and Equity Long/Short (within 4 bps)
  • Least accurate: Healthcare (5.98% better than expected), Technology (2.17% better) and Equity Long Only (0.67% better)
  • Overall, our projections were 34% more accurate than naive forecasts of flat returns

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