EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: November 21, 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 0.06% last week as foreign equity losses stifled performance
  • Hedge funds are now up 0.31% for the month and 3.22% for the year
  • 22 of the 30 hedge fund strategies we track earned positive returns
  • US equities continued post-election gains, but fixed income vehicles and foreign securities mostly declined
  • US equities rose once again, but foreign equities mostly fell
  • Bonds struggled worldwide, suffering particularly large losses overseas
  • Gold continued to fall, but energy gains lifted our broad commodities index
  • Both developed and emerging market currencies depreciated against the dollar
  • All of our short volatility and variance strategies produced gains
  • Trend following and momentum strategies produced mixed, but generally modest performance
  • We currently estimate that hedge funds returned -0.28% in October, 0.32% less than our initial projection of 0.04%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.06% last week as foreign equity losses stifled performance
  • Hedge funds are now up 0.31% for the month and 3.22% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.27%), high yield credit spreads (0.07%) and alpha (0.06%)
  • It indicates negative weekly contributions from the spread between developed market equities and US equities (-0.35%), commodity momentum (-0.07%) and equity region beta (-0.04%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.06%, 0.26% and 0.17%, respectively

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Strategy Performance

  • 22 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Equity Long Only (0.72%), Energy (0.63%) and Latin America (0.54%)
  • Laggards: Equity Short-Bias (-0.59%), Emerging Asia (-0.56%) and Healthcare (-0.27%)
  • North American funds outperformed both Asian and European funds
  • The spread between developed market equities and US equities was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (0.61%), Multi-Strategy (0.19%) and Managed Futures (0.18%)
  • Alpha laggards: Latin America (-0.65%), Energy (-0.24%) and Technology (-0.23%)

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Global Benchmarks

  • US equities continued post-election gains, but fixed income vehicles and foreign securities mostly declined
  • Leaders: oil futures (5.01%), energy commodities (4.49%) and US telecommunications equity (2.94%)
  • Laggards: developed ex-US government bonds (-3.01%), global risk parity (-2.71%) and global bonds (-2.17%)
  • Equities: US equities rose once again, but foreign equities mostly fell
  • Bonds: bonds struggled worldwide, suffering particularly large losses overseas
  • Real Estate: real estate securities gained in the US, but declined abroad
  • Commodities: gold continued to fall, but energy gains lifted our broad commodities index
  • Currencies: both developed and emerging market currencies depreciated against the dollar
  • Multi-Asset: risk parity strategies substantially underperformed 60/40 and global strategies underperformed US-centric 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: US equity index size (2.63%), US equity size (2.38%) and VIX futures term structure (2.37%)
  • Laggards: the spread between US 5-year and 1-year investment grade bonds (-3.41%), the spread between global and US aggregate bonds (-3.07%) and the spread between developed market and US government bonds (-2.91%)
  • Commodity: term structure, trend following, and medium-term momentum strategies all declined
  • Credit: high yield bonds outperformed investment grade bonds worldwide
  • Equity: size factors gained in developed markets and value factors outperformed in the US
  • Fixed Income: term structure strategies fell globally along with most other fixed income factors
  • Foreign Exchange: currency carry strategies produced positive returns, but momentum and value strategies declined
  • Multi-Asset: trend following and short-term multi-asset class momentum strategies generated modest profits
  • Real Estate: real estate securities substantially underperformed small cap equities worldwide
  • Risk: all of our short volatility and variance strategies produced gains, led by our VIX term structure strategy
  • Momentum: trend following and momentum strategies produced mixed, but generally modest performance

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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 -0.28% in October, 0.32% less than our initial projection of 0.04%
  • As of this moment, we correctly predicted the direction of 22 of 30 strategies
  • We were within 25 basis points for 10 indexes and within 50 basis points for 19
  • Our hit rate was below average but our accuracy was about average
  • 12 strategies performed better than we anticipated; 18 performed worse
  • Most accurate: Convertible Arbitrage (within 3 basis points), Fixed Income Arbitrage (within 5 bps) and Fund of Funds (within 6 bps)
  • Least accurate: Healthcare (5.35% worse than expected), Energy (1.29% worse) and Latin America (1.24% better)
  • Overall, our projections were 47% more accurate than naive forecasts of flat returns

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