EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: November 28, 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 0.32% last week as domestic equity gains fueled performance
  • Hedge funds are now up 0.69% for the month and 3.63% for the year
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Equities continued to rise, while gold and global government bonds continued to fall
  • Equities gained in every major region and sector
  • Government bonds stumbled for the second straight week, but high yield bonds mostly rose
  • Gold fell once again, but base metals soared, leading our broad commodity index upwards
  • Both developed and emerging market currencies depreciated modestly against the dollar
  • All of our short volatility and variance strategies produced gains
  • Trend following and momentum strategies tended to produce modest positive returns
  • We currently estimate that hedge funds returned -0.27% in October, 0.31% less than our initial projection of 0.04%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.32% last week as domestic equity gains fueled performance
  • Hedge funds are now up 0.69% for the month and 3.63% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.37%), alpha (0.10%) and short volatility (0.04%)
  • It indicates negative weekly contributions from the spread between developed market equities and US equities (-0.07%), currency momentum (-0.04%) and equity size (-0.03%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.10%, 0.41% and 0.51%, respectively

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (1.35%), Energy (0.77%) and Equity Long Only (0.64%)
  • Laggards: Equity Short-Bias (-0.77%), Healthcare (-0.33%) and Equity Market Neutral (0.01%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (0.34%), Managed Futures (0.32%) and Healthcare (0.15%)
  • Alpha laggards: Latin America (-0.39%), Emerging Europe (-0.20%) and Energy (-0.14%)

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Global Benchmarks

  • Equities continued to rise, while gold and global government bonds continued to fall
  • Leaders: base metals (7.50%), US telecommunications equity (4.52%) and US materials equity (3.04%)
  • Laggards: gold futures (-2.52%), precious metals (-2.25%) and oil futures (-0.64%)
  • Equities: equities gained broadly, in every major region and sector
  • Bonds: government bonds stumbled for the second straight week, but high yield bonds mostly rose
  • Real Estate: real estate securities profited both domestically and internationally
  • Commodities: gold fell once again, but base metals soared, leading our broad commodity index upwards
  • Currencies: both developed and emerging market currencies depreciated modestly against the dollar
  • Multi-Asset: 60/40 outperformed risk parity, but all of our multi-asset class benchmarks rose

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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 telecommunications equity and the market (2.73%), emerging market equity value (2.10%) and commodity trend following (2.09%)
  • Laggards: the spread between US healthcare equity and the market (-2.02%), currency value (-1.65%) and 1-year commodity sector momentum (-1.62%)
  • Commodity: term structure, trend following, and medium-term momentum strategies all gained
  • Credit: high yield bonds outperformed investment grade bonds in the US and in emerging markets
  • Equity: value factors rose worldwide, while size factors rose in the US and fell in foreign markets
  • Fixed Income: term structure strategies dropped domestically, but gained modestly in Europe
  • Foreign Exchange: currency carry, momentum and value strategies all declined
  • Multi-Asset: trend following and short-term multi-asset class momentum strategies generated mild profits
  • Real Estate: real estate securities underperformed small cap equities in the US, but outperformed abroad
  • Risk: all of our short volatility and variance strategies produced gains, led by our VIX term structure strategy
  • Momentum: trend following and momentum strategies tended to produce modest positive returns

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October 2016 Projection Review

  • All 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 -0.27% in October, 0.31% 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 nine indexes and within 50 basis points for 18
  • Our hit rate was below average but our accuracy was about average
  • 13 strategies performed better than we anticipated; 17 performed worse
  • Most accurate: Relative Value (within 3 basis points), Convertible Arbitrage (within 7 bps) and Equity Growth (within 9 bps)
  • Least accurate: Healthcare (5.54% worse than expected), Latin America (2.55% better) and Energy (1.32% worse)
  • Overall, our projections were 46% more accurate than naive forecasts of flat returns

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