EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: December 26, 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 0.04% last week as emerging equity losses negated gains from other factors
  • Hedge funds are now up 0.62% for the month and 4.19% for the year
  • 12 of the 30 hedge fund strategies we track earned positive returns
  • Commodities fell, but most other global asset classes notched modest positive returns
  • Equities gained in developed markets but stumbled in emerging markets
  • Bonds gained globally and across the credit spectrum
  • Losses by agricultural commodities and base metals pushed our broad commodity index downward
  • Developed market currencies depreciated modestly while emerging market currencies held flat
  • All of our short volatility and variance factors rose
  • Trend following and momentum strategies declined in and across most asset classes
  • We currently estimate that hedge funds returned 0.61% in November, 0.07% more than our initial projection of 0.54%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.04% last week as emerging equity losses negated gains from other factors
  • Hedge funds are now up 0.62% for the month and 4.19% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between MLPs and REITs (0.10%), equity beta (0.07%) and short volatility (0.03%)
  • It indicates negative weekly contributions from the spread between emerging market and developed market equities (-0.11%), equity sector beta (-0.05%) and agricultural commodity beta (-0.04%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.03%, 0.20% and 0.83%, respectively

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Strategy Performance

  • 12 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (0.56%), Distressed Securities (0.36%) and Special Situations (0.29%)
  • Laggards: Emerging Asia (-1.10%), Emerging Markets (-0.43%) and Commodities (-0.32%)
  • North American funds outperformed both Asian and European funds
  • The spread between emerging market and developed market equities was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (0.25%), Emerging Europe (0.16%) and Equity Growth (0.16%)
  • Alpha laggards: Energy (-0.19%), Equity Long Only (-0.17%) and Equity Value (-0.15%)

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Global Benchmarks

  • Commodities fell, but most other global asset classes notched modest positive returns
  • Leaders: US MLPs (4.32%), US telecommunications equity (2.42%) and US inflation-linked securities (1.27%)
  • Laggards: agricultural commodities (-3.12%), base metals (-3.09%) and emerging Asia equity (-2.47%)
  • Equities: equities gained in developed markets but stumbled in emerging markets
  • Bonds: bonds gained globally and across the credit spectrum
  • Real Estate: real estate securities declined in the US but rose abroad
  • Commodities: losses by agricultural commodities and base metals pushed our broad commodity index downward
  • Currencies: developed market currencies depreciated modestly while emerging market currencies held flat
  • Multi-Asset: risk parity outperformed 60/40, 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 inflation-linked bonds and US Treasuries (2.64%), the spread between US 10-year inflation-linked bonds and 10-year US Treasuries (2.24%) and the spread between Latin American and emerging market equity (2.06%)
  • Laggards: the spread between emerging and developed market equity (-2.01%), 1-year commodity momentum (-1.95%) and the spread between emerging and developed market equity indexes (-1.79%)
  • Commodity: term structure gained, but trend following and momentum strategies all declined
  • Credit: high yield underperformed investment grade in developed markets
  • Equity: size, value, and momentum factor performance varied materially by region
  • Fixed Income: term structure strategies gained both in the US and in Europe
  • Foreign Exchange: currency carry, momentum, and value strategies all declined
  • Multi-Asset: all of our multi-asset class trend following and momentum factors fell
  • Real Estate: real estate securities underperformed small cap equities domestically, but outperformed internationally
  • Risk: all of our short volatility and variance factors rose, led by our VIX term structure strategy
  • Momentum: trend following and momentum strategies declined in and across most asset classes

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November 2016 Projection Review

  • All 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 0.61% in November, 0.07% 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 18
  • Both our hit rate and our accuracy were about average
  • 15 strategies performed better than we anticipated; 15 performed worse
  • Most accurate: Equity Market Neutral (within 2 basis points), Event Driven (within 2 bps) and Hedge Funds (within 7 bps)
  • Least accurate: Latin America (3.43% worse than expected), Energy (3.06% better) and Healthcare (2.86% better)
  • Overall, our projections were 70% more accurate than naive forecasts of flat returns

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