EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: October 31, 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 0.26% last week as equity beta exposure fueled losses
  • Hedge funds are now down 0.21% for the month and up 2.93% for the year
  • Only three of the 30 hedge fund strategies we track earned positive returns
  • Most major markets declined, leaving investors with little room to avoid losses
  • Equities fell in most regions and sectors as only consumer staples and utilities eked out gains
  • Bonds declined globally, losing even more than equities on a risk-adjusted basis
  • Commodities fell, but term structure, trend following and medium-term momentum strategies all rose
  • Currency carry, momentum and value strategies all declined
  • All of our short volatility factors fell, but our short variance factors gained mildly
  • Trend following and momentum strategies tended to gain within commodities and decline elsewhere
  • We currently estimate that hedge funds returned 0.46% in September, 0.18% less than our initial projection of 0.64%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.26% last week as equity beta exposure fueled losses
  • Hedge funds are now down 0.21% for the month and up 2.93% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and US equities (0.05%), commodity momentum (0.04%) and high yield credit spreads (0.03%)
  • It indicates negative weekly contributions from equity beta (-0.21%), fixed income term structure (-0.08%) and equity size (-0.05%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.02%, -0.08% and -0.44%, respectively

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Strategy Performance

  • Only three of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (0.54%), Equity Short-Bias (0.48%) and Convertible Arbitrage (0.23%)
  • Laggards: Healthcare (-1.25%), Technology (-0.79%) and Energy (-0.72%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Healthcare (0.52%), Technology (0.50%) and Equity Value (0.25%)
  • Alpha laggards: Equity Short-Bias (-0.63%), Managed Futures (-0.52%) and Global Macro (-0.14%)

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Global Benchmarks

  • Most major markets declined, leaving investors with little room to avoid losses
  • Leaders: base metals (5.04%), US consumer staples equity (0.93%) and precious metals (0.90%)
  • Laggards: oil futures (-4.22%), energy commodities (-3.88%) and US REITs (-3.46%)
  • Equities: equities fell in most regions and sectors as only consumer staples and utilities eked out gains
  • Bonds: bonds declined globally, losing even more than equities on a risk-adjusted basis
  • Real Estate: real estate securities worldwide joined in equity losses
  • Commodities: most sectors gained, but energy losses were sufficient to drive our broad commodity index down for the week
  • Currencies: developed market currencies appreciated modestly against the dollar while emerging market currencies depreciated
  • Multi-Asset: all of our multi-asset class benchmarks fell, with risk parity strategies underperforming 60/40 strategies

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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 US listed private equity and small cap equity (2.94%), developed market equity value (2.56%) and US equity value (2.13%)
  • Laggards: the spread between 10-year and 1-year European government bonds (-2.63%), US equity size (-2.27%) and US equity index size (-2.20%)
  • Commodity: term structure, trend following and medium-term momentum strategies all rose
  • Credit: corporate bonds outperformed government bonds at longer durations, but underperformed at shorter durations
  • Equity: size factors fell and value factors rose while momentum and trend following strategies posted mixed results
  • Fixed Income: term structure strategies fell both in the US and abroad
  • Foreign Exchange: currency carry, momentum and value strategies all declined
  • Multi-Asset: multi-asset class trend following and medium-term momentum strategies produced losses
  • Real Estate: real estate securities underperformed small cap equities both in the US and abroad
  • Risk: all of our short volatility factors fell, but our short variance factors gained mildly
  • Momentum: trend following and momentum strategies tended to gain within commodities and decline elsewhere

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September 2016 Projection Review

  • All 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 0.46% in September, 0.18% 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 15 indexes and within 50 basis points for 24
  • Our hit rate was about average but our accuracy was above average
  • 14 strategies performed better than we anticipated; 15 performed worse
  • Most accurate: Credit (exact), Distressed Securities (within 2 basis points) and Equity Short-Bias (within 2 bps)
  • Least accurate: Healthcare (5.23% better than expected), Technology (2.09% better) and Emerging Asia (1.55% worse)
  • Overall, our projections were 32% more accurate than naive forecasts of flat returns

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