EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: December 12, 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 0.87% last week as rising equities fueled gains
  • Hedge funds are now up 0.70% for the month and 4.35% for the year
  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Global equity strength led risky assets upward while defensive assets stumbled
  • Equities gained in every major region and sector
  • Developed market government and investment grade bonds struggled, but high yield rose worldwide
  • Our broad commodity index notched gains despite modest declines in oil and gold
  • Developed market currencies depreciated against the dollar, but emerging market currencies appreciated
  • All of our short volatility and variance strategies rose
  • Trend following and momentum strategies struggled in most asset classes
  • We currently estimate that hedge funds returned 0.69% in November, 0.15% more than our initial projection of 0.54%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.87% last week as rising equities fueled gains
  • Hedge funds are now up 0.70% for the month and 4.35% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.76%), alpha (0.10%) and multi-asset class momentum (0.08%)
  • It indicates negative weekly contributions from the spread between developed market equities and US equities (-0.10%), equity size (-0.08%) and commodity momentum (-0.06%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.10%, 0.06% and 0.77%, respectively

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Strategy Performance

  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (2.56%), Equity Long Only (1.81%) and Latin America (1.32%)
  • Laggards: Equity Short-Bias (-1.40%), Healthcare (0.11%) and Commodities (0.14%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (0.72%), Managed Futures (0.68%) and Distressed Securities (0.19%)
  • Alpha laggards: Healthcare (-0.52%), Latin America (-0.43%) and Convertible Arbitrage (-0.41%)

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Global Benchmarks

  • Global equity strength led risky assets upward while defensive assets stumbled
  • Leaders: US small cap equity (5.30%), emerging EMEA equity (5.11%) and US financials equity (4.78%)
  • Laggards: developed ex-US government bonds (-1.48%), gold futures (-1.34%) and precious metals (-0.96%)
  • Equities: equities gained in every major region and sector
  • Bonds: developed market government and investment grade bonds struggled, but high yield rose worldwide
  • Real Estate: real estate securities followed equities upward both domestically and abroad
  • Commodities: our broad commodity index notched gains despite modest declines in oil and gold
  • Currencies: developed market currencies depreciated against the dollar, but emerging market currencies appreciated
  • 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 municipal bonds and US Treasuries (4.75%), developed market equity value (4.23%) and US equity size (3.01%)
  • Laggards: the spread between US healthcare equity and the market (-2.74%), developed market equity size (-2.36%) and 1-year commodity sector momentum (-1.87%)
  • Commodity: medium-term momentum strategies posted material losses, but term structure and trend following held even
  • Credit: markets again rewarded credit risk with positive returns
  • Equity: momentum struggled, but value factors rose worldwide and size factors gained in the US
  • Fixed Income: term structure strategies declined globally
  • Foreign Exchange: currency carry rallied, but momentum and value declined modestly
  • Multi-Asset: all of our multi-asset class benchmarks rose, led by our short-term momentum strategy
  • Real Estate: REITs materially underperformed small cap equities
  • Risk: all of our short volatility and variance strategies rose
  • Momentum: trend following and momentum strategies struggled in most asset classes

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November 2016 Projection Review

  • Most of the indexes underlying our composite indexes have reported November returns, but our analysis is still preliminary and subject to change
  • We currently estimate that hedge funds returned 0.69% in November, 0.15% more than our initial projection of 0.54%
  • As of this moment, we correctly predicted the direction of 27 of 30 strategies
  • We were within 25 basis points for nine indexes and within 50 basis points for 17
  • Both our hit rate and our accuracy were about average
  • 16 strategies performed better than we anticipated; 14 performed worse
  • Most accurate: Equity Long/Short (within 1 basis point), Convertible Arbitrage (within 4 bps) and Fixed Income Arbitrage (within 9 bps)
  • Least accurate: Energy (3.48% better than expected), Healthcare (3.37% better) and Latin America (2.51% worse)
  • Overall, our projections were 70% more accurate than naive forecasts of flat returns

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