EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: January 23, 2017

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 0.14% last week as broad equity losses stifled returns
  • Hedge funds are now up 0.78% for the month and year
  • Only seven of the 30 hedge fund strategies we track earned positive returns
  • Most major asset classes fell amid global financial weakness
  • Equities declined in most regions, sectors, and segments
  • All of our global bond indexes stumbled
  • Commodities declined modestly, fueled by losses in base metals and energy
  • Both developed and emerging market currencies appreciated against the dollar
  • Most of our short volatility and variance factors rose
  • Trend following and momentum strategies produced underwhelming results both within and across asset classes
  • We currently estimate that hedge funds returned 0.87% in December, 0.20% more than our initial projection of 0.67%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.14% last week as broad equity losses stifled returns
  • Hedge funds are now up 0.78% for the month and year
  • Our factor attribution analysis suggests positive weekly contributions from alpha (0.08%), liquidity factors (0.02%) and short volatility (0.02%)
  • It indicates negative weekly contributions from equity sector beta (-0.07%), equity beta (-0.06%) and fixed income term structure (-0.05%)
  • It estimates weekly and year-to-date alphas of 0.08% and -0.17%, respectively

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Strategy Performance

  • Only seven of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (0.58%), Special Situations (0.15%) and Merger Arbitrage (0.11%)
  • Laggards: Healthcare (-0.80%), Managed Futures (-0.70%) and Equity Growth (-0.33%)
  • North American funds outperformed both Asian and European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Healthcare (0.48%), Convertible Arbitrage (0.31%) and Technology (0.28%)
  • Alpha laggards: Managed Futures (-0.77%), Global Macro (-0.25%) and Equity Short-Bias (-0.20%)

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Global Benchmarks

  • Most major asset classes fell amid global financial weakness
  • Leaders: US consumer staples equity (1.98%), Latin America equity (1.20%) and agricultural commodities (1.18%)
  • Laggards: US healthcare equity (-1.59%), base metals (-1.35%) and US financials equity (-1.20%)
  • Equities: equities declined in most regions, sectors, and segments
  • Bonds: all of our global bond indexes stumbled, with long-dated US Treasuries producing the largest losses
  • Real Estate: real estate securities rose domestically but fell abroad
  • Commodities: commodities declined modestly, fueled by losses in base metals and energy
  • Currencies: both developed and emerging market currencies appreciated against the dollar
  • Multi-Asset: all of our multi-asset class benchmarks fell, with risk parity strategies underperforming 60/40

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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 consumer staples equity and the market (2.34%), the spread between US REITs and small cap equities (1.22%) and the spread between Latin American and emerging market equity (1.10%)
  • Laggards: the spread between 10-year and 1-year European government bonds (-1.53%), the spread between US healthcare equity and the market (-1.47%) and emerging market equity value (-1.45%)
  • Commodity: momentum, trend following, and term structure strategies all struggled
  • Credit: credit exposures tended to produce gains overseas, but losses domestically
  • Equity: size and value factors produced mixed results globally, but were generally negative in the US
  • Fixed Income: term structure strategies struggled both in the US and in Europe
  • Foreign Exchange: currency carry rose modestly, but other alternative currency factors fell
  • Multi-Asset: our multi-asset class momentum and trend following strategies generated mixed, but muted performance
  • Real Estate: real estate securities materially outperformed small cap equities in the US, but underperformed abroad
  • Risk: most of our short volatility and variance factors rose, with only our VIX term structure strategy declining
  • Momentum: trend following and momentum strategies produced underwhelming results both within and across asset classes

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December 2016 Projection Review

  • Most of the indexes underlying our composite indexes have reported December returns, but our analysis is still preliminary and subject to change
  • We currently estimate that hedge funds returned 0.87% in December, 0.20% more than our initial projection of 0.67%
  • As of this moment, we correctly predicted the direction of 26 of 30 strategies
  • We were within 25 basis points for 17 indexes and within 50 basis points for 25
  • Our hit rate was about average but our accuracy was above average
  • 20 strategies performed better than we anticipated; eight performed worse
  • Most accurate: Distressed Securities (exact), Fixed Income Arbitrage (exact) and Convertible Arbitrage (within 1 basis point)
  • Least accurate: Energy (1.04% better than expected), Equity Short-Bias (0.99% worse) and Europe (0.83% better)
  • Overall, our projections were 90% more accurate than naive forecasts

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