EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: October 24, 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 0.39% last week as equity factor gains overcame alpha losses
  • Hedge funds are now up 0.02% for the month and 3.22% for the year
  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Most of our global benchmarks rose, trimming month-to-date losses in most asset classes
  • Equities gained in all major regions and across most sectors
  • Developed market government bonds posted losses, but most other fixed income benchmarks notched gains
  • Alternative commodity factors posted mixed, but mostly negative performance
  • Currency carry, momentum and value strategies all rose
  • All of our short volatility and variance factors rose, led by our short VIX futures strategy
  • Trend following and momentum strategies fell in commodities and developed market equities but rose elsewhere
  • We currently estimate that hedge funds returned 0.51% in September, 0.13% less than our initial projection of 0.64%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.39% last week as equity factor gains overcame alpha losses
  • Hedge funds are now up 0.02% for the month and 3.22% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity sector beta (0.16%), equity beta (0.10%) and the spread between emerging market and developed market equities (0.06%)
  • It indicates negative weekly contributions from alpha (-0.19%), equity region beta (-0.05%) and the spread between non-government bonds and government bonds (-0.01%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.19%, -0.14% and -0.45%, respectively

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Strategy Performance

  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (1.48%), Energy (0.84%) and Special Situations (0.78%)
  • Laggards: Equity Short-Bias (-0.54%), Equity Market Neutral (0.18%) and Commodities (0.19%)
  • North American funds outperformed both Asian and European funds
  • Equity sector beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (0.22%), Managed Futures (0.21%) and Commodities (0.11%)
  • Alpha laggards: Latin America (-0.46%), Event Driven (-0.21%) and Emerging Asia (-0.21%)

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Global Benchmarks

  • Most of our global benchmarks rose, trimming month-to-date losses in most asset classes
  • Leaders: Latin America equity (3.97%), US materials equity (1.96%) and US MLPs (1.61%)
  • Laggards: US telecommunications equity (-3.28%), base metals (-1.65%) and developed ex-US currencies (-0.49%)
  • Equities: equities gained in all major regions and across most sectors
  • Bonds: developed market government bonds posted losses, but most other fixed income benchmarks notched gains
  • Real Estate: real estate securities rose worldwide
  • Commodities: base metals fell once again, offsetting gains in precious metals and leading our broad commodity index to a slight decline
  • Currencies: developed market currencies depreciated against the dollar but emerging market currencies appreciated
  • Multi-Asset: all of our multi-asset class benchmarks rose, led by our US risk parity index

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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: developed market equity value (2.10%), the spread between Latin American and emerging market equity (1.87%) and short short-dated VIX futures (1.60%)
  • Laggards: the spread between US telecommunications equity and the market (-3.38%), 1-month commodity sector momentum (-1.24%) and the spread between developed market and US government bonds (-1.05%)
  • Commodity: term structure strategies rose, but momentum and trend following factors fell
  • Credit: corporate bonds modestly outperformed government bonds, particularly at shorter durations
  • Equity: size and value factor performance varied by region while momentum struggled in developed markets
  • Fixed Income: term structure strategies gained in the US, but fell in Europe
  • Foreign Exchange: currency carry, momentum and value strategies all rose
  • Multi-Asset: multi-asset class trend following and medium-term momentum strategies produced modest positive returns
  • Real Estate: real estate securities outperformed small cap equities both in the US and abroad
  • Risk: all of our short volatility and variance factors rose, led by our short VIX futures strategy
  • Momentum: trend following and momentum strategies fell in commodities and developed market equities but rose 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 0.51% in September, 0.13% less 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
  • 13 strategies performed better than we anticipated; 17 performed worse
  • Most accurate: Fund of Funds (within 1 basis point), Credit (within 2 bps) and North America (within 4 bps)
  • Least accurate: Healthcare (5.11% better than expected), Technology (2.05% better) and Emerging Asia (1.55% worse)
  • Overall, our projections were 32% more accurate than naive forecasts of flat returns

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