EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: October 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 0.04% in October as non-equity factor gains offset equity losses
  • Hedge funds are now up 3.19% for the year
  • 15 of the 30 hedge fund strategies we track earned positive returns
  • Diversification did little to prevent losses as most asset classes stumbled
  • Equities fell in most regions, but rose materially in Latin America
  • Developed market government bonds and investment grade bonds struggled, particularly on a risk-adjusted basis
  • Commodities fell, and so did commodity term structure, trend following and momentum factors
  • Developed market currencies depreciated materially against the dollar
  • Short variance factors tended to gain even as short volatility factors were relatively flat
  • Trend following and momentum strategies underperformed within and across most asset classes
  • Hedge funds returned 0.45% in September, 0.19% less than our initial projection of 0.64%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.04% in October as non-equity factor gains offset equity losses
  • Hedge funds are now up 3.19% for the year
  • Our factor attribution analysis suggests positive monthly contributions from high yield credit spreads (0.26%), alpha (0.24%) and the spread between emerging market and developed market equities (0.15%)
  • It indicates negative monthly contributions from equity beta (-0.49%), equity region beta (-0.13%) and fixed income term structure (-0.10%)
  • It estimates month-to-date and year-to-date alphas of 0.24% and 0.21%, respectively

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Strategy Performance

  • 15 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (2.90%), Emerging Europe (1.33%) and Distressed Securities (0.82%)
  • Laggards: Managed Futures (-2.00%), Energy (-1.27%) and Emerging Asia (-1.10%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Healthcare (3.23%), Technology (0.79%) and Equity Value (0.68%)
  • Alpha laggards: Managed Futures (-1.46%), Equity Short-Bias (-1.25%) and Latin America (-1.19%)

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Global Benchmarks

  • Diversification did little to prevent losses as most asset classes stumbled
  • Leaders: Latin America equity (9.47%), agricultural commodities (2.77%) and base metals (0.91%)
  • Laggards: US healthcare equity (-6.80%), US REITs (-5.53%) and global real estate (-5.38%)
  • Equities: equities fell in most regions, but rose materially in Latin America
  • Bonds: developed market government bonds and investment grade bonds struggled, particularly on a risk-adjusted basis
  • Real Estate: real estate securities plummeted both in the US and abroad
  • Commodities: our broad commodities index declined as energy and precious metals commodities fell
  • Currencies: developed market currencies depreciated materially against the dollar
  • Multi-Asset: all of our multi-asset class benchmarks fell, with risk parity strategies heavily 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: developed market equity value (7.40%), the spread between Latin American and emerging market equity (6.83%) and the spread between developed market high yield and investment grade credit (6.02%)
  • Laggards: the spread between global and US inflation-linked securities (-5.53%), the spread between US healthcare equity and the market (-5.11%) and the spread between global and US aggregate bonds (-5.00%)
  • Commodity: term structure, trend following and medium-term momentum strategies all declined
  • Credit: corporate bonds outperformed government bonds both domestically and overseas
  • Equity: size and momentum factors underperformed, but value factors soared
  • Fixed Income: term structure strategies fell both in the US and abroad
  • Foreign Exchange: currency carry rallied, but returns to momentum and value strategies were modest
  • Multi-Asset: multi-asset class trend following and medium-term momentum strategies produced losses
  • Real Estate: real estate securities substantially underperformed small cap equities worldwide
  • Risk: short variance factors tended to gain even as short volatility factors were relatively flat
  • Momentum: trend following and momentum strategies underperformed within and across most asset classes

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September 2016 Projection Review

  • All of the indexes underlying our composite indexes have reported September returns
  • Hedge funds returned 0.45% in September, 0.19% less than our initial projection of 0.64%
  • 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; 16 performed worse
  • Most accurate: Credit (within 1 basis point), Distressed Securities (within 2 bps) and North America (within 4 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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