EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: December 19, 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 fell 0.11% last week as equity losses offset alpha gains
  • Hedge funds are now up 0.63% for the month and 4.21% for the year
  • Only nine of the 30 hedge fund strategies we track earned positive returns
  • All major asset classes declined amid global weakness
  • Equities fell in cyclical sectors and in most regions worldwide
  • Bonds stumbled globally, with only foreign high yield posting gains
  • Our broad commodity index declined even though oil rose modestly
  • Both developed and emerging market currencies depreciated against the dollar
  • Most of our short volatility and variance factors rose
  • Trend following and momentum strategies posted mixed performance
  • We currently estimate that hedge funds returned 0.63% in November, 0.09% more than our initial projection of 0.54%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.11% last week as equity losses offset alpha gains
  • Hedge funds are now up 0.63% for the month and 4.21% for the year
  • Our factor attribution analysis suggests positive weekly contributions from alpha (0.13%), equity region beta (0.08%) and high yield credit spreads (0.07%)
  • It indicates negative weekly contributions from equity sector beta (-0.13%), the spread between emerging market and developed market equities (-0.09%) and commodity momentum (-0.08%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.13%, 0.21% and 0.86%, respectively

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Strategy Performance

  • Only nine of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (0.55%), Managed Futures (0.46%) and Equity Short-Bias (0.41%)
  • Laggards: Latin America (-1.61%), Emerging Asia (-1.12%) and Energy (-0.69%)
  • North American funds outperformed both Asian and European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Managed Futures (0.61%), Emerging Asia (0.57%) and Global Macro (0.29%)
  • Alpha laggards: Latin America (-0.29%), Equity Short-Bias (-0.24%) and Distressed Securities (-0.12%)

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Global Benchmarks

  • All major asset classes declined amid global weakness
  • Leaders: US telecommunications equity (1.89%), US utilities equity (1.71%) and US healthcare equity (1.53%)
  • Laggards: Latin America equity (-4.02%), global ex-US real estate (-2.60%) and precious metals (-2.52%)
  • Equities: equities fell in cyclical sectors and in most regions worldwide
  • Bonds: bonds stumbled globally, with only foreign high yield posting gains
  • Real Estate: real estate securities followed equities downward both domestically and abroad
  • Commodities: our broad commodity index declined even though oil rose modestly
  • Currencies: both developed and emerging market currencies depreciated against the dollar
  • Multi-Asset: 60/40 outperformed risk parity, but all of our multi-asset class benchmarks fell

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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 emerging European and emerging market equity (2.77%), emerging market equity size (2.19%) and the spread between US telecommunications equity and the market (1.99%)
  • Laggards: the spread between US inflation-linked bonds and US Treasuries (-3.09%), 1-year developed market equity country momentum (-2.85%) and US equity size (-2.74%)
  • Commodity: term structure, trend following, and medium-term momentum strategies all declined
  • Credit: markets once again rewarded credit risk with positive returns
  • Equity: small caps materially underperformed large caps in developed markets and value stocks trailed growth stocks globally
  • Fixed Income: term structure strategies declined in the US but rose in Europe
  • Foreign Exchange: currency carry and momentum strategies gained, but value fell
  • Multi-Asset: our multi-asset class trend following strategy rose, but medium-term momentum declined
  • Real Estate: real estate securities materially underperformed small cap equities overseas, but outperformed domestically
  • Risk: most of our short volatility and variance factors rose, led by our VIX term structure strategy
  • Momentum: trend following and momentum strategies posted mixed performance

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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 0.63% in November, 0.09% more than our initial projection of 0.54%
  • As of this moment, we correctly predicted the direction of 28 of 30 strategies
  • We were within 25 basis points for 12 indexes and within 50 basis points for 18
  • Our hit rate was above average but our accuracy was about average
  • 16 strategies performed better than we anticipated; 14 performed worse
  • Most accurate: Emerging Europe (within 1 basis point), Convertible Arbitrage (within 4 bps) and Equity Market Neutral (within 4 bps)
  • Least accurate: Healthcare (3.31% better than expected), Energy (2.73% better) and Latin America (1.64% worse)
  • Overall, our projections were 74% more accurate than naive forecasts of flat returns

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