EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: November 14, 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 0.76% last week as rising US equities fueled gains
  • Hedge funds are now up 0.17% for the month and 3.02% for the year
  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Surprising US election results lifted domestic equities while crippling fixed income vehicles and crushing emerging market currencies
  • Equities rallied in the US, particularly among small caps and financials
  • Bonds suffered widespread losses as all of our major government and corporate indexes declined
  • Gold plummeted as investors shifted away from defensive securities
  • Both developed and emerging market currencies depreciated against the dollar, but losses in emerging markets were abnormally large
  • All of our short volatility and variance strategies produced gains, led by our short US equity variance factors
  • Trend following strategies tended to rise, but medium-term momentum strategies fell both within and across most asset classes
  • We currently estimate that hedge funds returned -0.32% in October, 0.36% less than our initial projection of 0.04%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.76% last week as rising US equities fueled gains
  • Hedge funds are now up 0.17% for the month and 3.02% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.97%), alpha (0.27%) and equity sector beta (0.19%)
  • It indicates negative weekly contributions from the spread between developed market equities and US equities (-0.69%), the spread between emerging market and developed market equities (-0.17%) and equity size (-0.13%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.27%, 0.12% and -0.02%, respectively

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Strategy Performance

  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (3.36%), Equity Long Only (2.52%) and Equity Value (2.20%)
  • Laggards: Latin America (-4.22%), Equity Short-Bias (-2.05%) and Commodities (-0.38%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (1.38%), Event Driven (0.60%) and Emerging Asia (0.54%)
  • Alpha laggards: Latin America (-1.04%), Energy (-0.77%) and Healthcare (-0.73%)

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Global Benchmarks

  • Surprising US election results lifted domestic equities while crippling fixed income vehicles and crushing emerging market currencies
  • Leaders: US small cap equity (9.73%), US financials equity (9.38%) and US industrials equity (7.92%)
  • Laggards: Latin America equity (-10.26%), gold futures (-6.20%) and precious metals (-6.07%)
  • Equities: equities rallied in the US, particularly among small caps and financials; Latin American equities suffered over rising fears of US protectionism
  • Bonds: bonds endured widespread losses as all of our major government and corporate indexes declined
  • Real Estate: real estate securities were nearly flat in the US, but struggled mightily overseas
  • Commodities: gold plummeted as investors shifted away from defensive securities
  • Currencies: both developed and emerging market currencies depreciated against the dollar, but losses in emerging markets were abnormally large
  • Multi-Asset: US-centric portfolios outperformed, but risk parity strategies worldwide stumbled due to poor fixed income performance

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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: US equity index size (8.24%), the spread between US industrials equity and the market (6.32%) and the spread between US financials equity and the market (5.67%)
  • Laggards: emerging market currencies (-10.62%), the spread between US consumer staples equity and the market (-6.73%) and the spread between US listed private equity and small cap equity (-6.70%)
  • Commodity: term structure and trend following strategies posted positive returns, but medium-term momentum strategies declined
  • Credit: corporate bonds outperformed government bonds, particularly at longer durations
  • Equity: value factors performed well worldwide, while small cap equities surged in the US relative to large caps
  • Fixed Income: term structure strategies fell globally; US inflation-linked bonds strongly outperformed US Treasuries
  • Foreign Exchange: currency momentum struggled, but carry and value strategies produced modest gains
  • Multi-Asset: medium-term multi-asset class momentum strategies produced meaningful losses
  • Real Estate: real estate securities substantially underperformed small cap equities both in the US and abroad
  • Risk: all of our short volatility and variance strategies produced gains, led by our short US equity variance factors
  • Momentum: trend following strategies tended to rise, but medium-term momentum strategies fell both within and across most asset classes

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October 2016 Projection Review

  • Most of the indexes underlying our composite indexes have reported October returns, but our analysis is still preliminary and subject to change
  • We currently estimate that hedge funds returned -0.32% in October, 0.36% less than our initial projection of 0.04%
  • As of this moment, we correctly predicted the direction of 23 of 30 strategies
  • We were within 25 basis points for seven indexes and within 50 basis points for 15
  • Both our hit rate and our accuracy were below average
  • 12 strategies performed better than we anticipated; 18 performed worse
  • Most accurate: Fixed Income Arbitrage (within 5 basis points), Fund of Funds (within 12 bps) and Equity Long/Short (within 13 bps)
  • Least accurate: Healthcare (5.58% worse than expected), Latin America (1.75% better) and Technology (1.40% worse)
  • Overall, our projections were 44% more accurate than naive forecasts of flat returns

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