EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: November 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 0.54% in November as domestic equity beta and manager alpha lifted returns
  • Hedge funds are now up 3.47% for the year
  • 21 of the 30 hedge fund strategies we track earned positive returns
  • US equities rallied, but losses in other regions and asset classes were material
  • All of our fixed income benchmarks fell, with the largest losses among foreign government bonds
  • Real estate securities substantially underperformed small cap equities in the US
  • Gold plummeted, but base metals and oil helped keep our broad commodity index in the black
  • Both developed and emerging market currencies depreciated significantly against the dollar
  • All of our short volatility and variance strategies produced gains
  • Medium-term momentum strategies struggled, even as trend following strategies gained
  • 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 0.54% in November as domestic equity beta and manager alpha lifted returns
  • Hedge funds are now up 3.47% for the year
  • Our factor attribution analysis suggests positive monthly contributions from equity beta (1.02%), alpha (0.37%) and equity sector beta (0.25%)
  • It indicates negative monthly contributions from the spread between developed market equities and US equities (-0.97%), currency momentum (-0.18%) and the spread between emerging market and developed market equities (-0.17%)
  • It estimates month-to-date and year-to-date alphas of 0.37% and 0.56%, respectively

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Strategy Performance

  • 21 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Energy (2.47%), Equity Value (2.44%) and Emerging Europe (1.91%)
  • Laggards: Latin America (-3.35%), Equity Short-Bias (-2.13%) and Managed Futures (-0.97%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (2.34%), North America (0.62%) and Multi-Strategy (0.58%)
  • Alpha laggards: Healthcare (-2.75%), Energy (-1.33%) and Europe (-1.21%)

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Global Benchmarks

  • US equities rallied, but losses in other regions and asset classes were material
  • Leaders: base metals (11.54%), US financials equity (10.77%) and US small cap equity (10.44%)
  • Laggards: Latin America equity (-10.50%), gold futures (-8.01%) and precious metals (-8.00%)
  • Equities: US stocks gained in most sectors and in all style classifications, but foreign equities declined in all major regions
  • Bonds: all of our fixed income benchmarks fell, with the largest losses among foreign government bonds
  • Real Estate: real estate securities dropped both domestically and internationally
  • Commodities: gold plummeted, but base metals and oil helped keep our broad commodity index in the black
  • Currencies: both developed and emerging market currencies depreciated significantly against the dollar
  • Multi-Asset: 60/40 materially outperformed risk parity, which struggled due to leveraged fixed income exposure

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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 (9.49%), US equity value (9.16%) and the spread between US industrials equity and the market (7.57%)
  • Laggards: the spread between US consumer staples equity and the market (-9.17%), the spread between US REITs and small cap equities (-8.08%) and emerging market currencies (-7.43%)
  • Commodity: term structure and trend following strategies rose, but medium-term momentum strategies struggled
  • Credit: although corporate bonds declined on an absolute return basis, they nevertheless outperformed government bonds
  • Equity: value factors rose worldwide, while size factors rose in the US and fell in foreign markets
  • Fixed Income: term structure strategies dropped both in the US and in Europe
  • Foreign Exchange: currency carry, momentum and value strategies all declined
  • Multi-Asset: medium-term momentum suffered, but trend following and short-term momentum strategies earned profits
  • Real Estate: real estate securities substantially underperformed small cap equities in the US
  • Risk: all of our short volatility and variance strategies produced gains, led by our short US variance strategies
  • Momentum: medium-term momentum strategies struggled, even as trend following strategies gained

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October 2016 Projection Review

  • All of the indexes underlying our composite indexes have reported October returns
  • Hedge funds returned -0.28% in October, 0.32% less than our initial projection of 0.04%
  • We correctly predicted the direction of 23 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
  • 14 strategies performed better than we anticipated; 16 performed worse
  • Most accurate: Relative Value (within 2 basis points), Convertible Arbitrage (within 2 bps) and Equity Growth (within 9 bps)
  • Least accurate: Healthcare (5.51% worse than expected), Latin America (2.55% better) and Energy (1.45% worse)
  • Overall, our projections were 46% more accurate than naive forecasts of flat returns

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