EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: December 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 0.67% in December as global equity gains fueled performance
  • Hedge funds are now up 4.43% for the year
  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Global risk assets finished 2016 with another positive month as equities, real estate, and commodities all rose
  • Equities gained in almost every region and sector
  • Corporate bonds rose even as developed market government bonds fell
  • Energy commodities soared, pushing our broad index upward despite losses in every other commodity sector
  • Both developed and emerging market currencies depreciated against the dollar
  • All of our short volatility and variance factors rose
  • Trend following and momentum strategies declined in and across most asset classes
  • Hedge funds returned 0.79% in November, 0.25% more than our initial projection of 0.54%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.67% in December as global equity gains fueled performance
  • Hedge funds are now up 4.43% for the year
  • Our factor attribution analysis suggests positive monthly contributions from equity beta (0.46%), the spread between developed market equities and US equities (0.18%) and equity region beta (0.15%)
  • It indicates negative monthly contributions from equity sector beta (-0.23%), commodity momentum (-0.21%) and the spread between emerging market and developed market equities (-0.16%)
  • It estimates month-to-date and year-to-date alphas of 0.09% and 0.86%, respectively

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Strategy Performance

  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (5.17%), Distressed Securities (1.69%) and Special Situations (1.29%)
  • Laggards: Emerging Asia (-1.58%), Equity Short-Bias (-0.23%) and Healthcare (-0.19%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Managed Futures (1.16%), Equity Short-Bias (0.60%) and Special Situations (0.57%)
  • Alpha laggards: Latin America (-0.48%), Europe (-0.33%) and Equity Long Only (-0.25%)

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Global Benchmarks

  • Global risk assets finished 2016 with another positive month as equities, real estate, and commodities all rose
  • Leaders: energy commodities (8.48%), US telecommunications equity (7.62%) and emerging EMEA equity (7.22%)
  • Laggards: base metals (-5.44%), precious metals (-2.04%) and gold futures (-1.85%)
  • Equities: equities gained in almost every region and sector
  • Bonds: corporate bonds rose even as developed market government bonds fell
  • Real Estate: real estate securities performed well globally with REITs rising nearly 5% in the US
  • Commodities: energy commodities soared, pushing our broad index upward despite losses in every other commodity sector
  • Currencies: both developed and emerging market currencies depreciated against the dollar
  • Multi-Asset: all of our multi-asset class benchmarks gained, with risk parity outperforming 60/40 domestically and underperforming globally

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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 (6.36%), the spread between US telecommunications equity and the market (5.08%) and the spread between developed European and developed market equity (4.46%)
  • Laggards: 1-year commodity momentum (-5.94%), 1-year commodity sector momentum (-5.35%) and 1-year developed market equity country momentum (-5.07%)
  • Commodity: medium-term momentum strategies plummeted as most alternative commodity strategies struggled
  • Credit: credit strategies rose worldwide and across the credit spectrum
  • Equity: value factors gained globally; size factors rose in the US but fell overseas
  • Fixed Income: term structure strategies gained in Europe but declined in the US
  • Foreign Exchange: currency carry notched healthy returns, but momentum and value strategies stumbled
  • Multi-Asset: short-term multi-asset class momentum rose, but medium term momentum fell
  • Real Estate: real estate securities outperformed small cap equities domestically, but underperformed 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
  • Hedge funds returned 0.79% in November, 0.25% more than our initial projection of 0.54%
  • We correctly predicted the direction of 28 of 30 strategies
  • We were within 25 basis points for eight indexes and within 50 basis points for 15
  • Our hit rate was above average but our accuracy was below average
  • 17 strategies performed better than we anticipated; 13 performed worse
  • Most accurate: Multi-Strategy (within 2 basis points), Fixed Income Arbitrage (within 4 bps) and Equity Market Neutral (within 11 bps)
  • Least accurate: Healthcare (3.98% better than expected), Energy (3.61% better) and Latin America (3.43% worse)
  • Overall, our projections were 65% more accurate than naive forecasts of flat returns

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