EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: January 30, 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 added 0.73% last week as rising equities continued to boost performance
  • Hedge funds are now up 1.45% for the month and year
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • All of our multi-asset class benchmarks rose, with 60/40 strategies narrowly edging risk parity
  • Equities continued their strong January, gaining in most regions and sectors worldwide
  • Bonds posted modest, but generally positive returns globally
  • Losses in gold and agricultural commodities drove our broad commodity index downward
  • Developed and emerging market currencies both appreciated against the dollar
  • Most of our short volatility and variance factors rose
  • Trend following and momentum strategies profited both within and across asset classes
  • We currently estimate that hedge funds returned 0.98% in December, 0.31% more than our initial projection of 0.67%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.73% last week as rising equities continued to boost performance
  • Hedge funds are now up 1.45% for the month and year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.25%), equity sector beta (0.23%) and the spread between MLPs and REITs (0.13%)
  • It indicates negative weekly contributions from alpha (-0.12%), fixed income term structure (-0.04%) and currency momentum (-0.02%)
  • It estimates weekly and year-to-date alphas of -0.12% and -0.37%, respectively

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (2.52%), Latin America (1.46%) and Emerging Asia (1.33%)
  • Laggards: Equity Short-Bias (-0.71%), Healthcare (-0.01%) and Commodities (0.13%)
  • North American funds matched Asian funds and outperformed European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (0.38%), Managed Futures (0.34%) and Emerging Europe (0.23%)
  • Alpha laggards: Healthcare (-0.89%), Energy (-0.49%) and Technology (-0.32%)

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Global Benchmarks

  • Equities continued their strong January, gaining in most regions and sectors worldwide
  • Leaders: US MLPs (4.89%), Latin America equity (3.79%) and US materials equity (3.36%)
  • Laggards: gold futures (-1.36%), US REITs (-1.16%) and agricultural commodities (-1.07%)
  • Equities: equities only declined in defensive sectors
  • Bonds: bonds posted modest, but generally positive returns globally
  • Real Estate: real estate securities stumbled domestically but rose abroad
  • Commodities: losses in gold and agricultural commodities drove our broad commodity index downward
  • Currencies: developed and emerging market currencies both appreciated against the dollar
  • Multi-Asset: all of our multi-asset class benchmarks rose, with 60/40 strategies narrowly edging risk parity

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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 MLPs and REITs (2.37%), the spread between US materials equity and the market (2.31%) and 1-year emerging market equity sector momentum (2.08%)
  • Laggards: 1-month developed market equity sector momentum (-2.51%), 1-month US sector momentum (-2.16%) and the spread between US telecommunications equity and the market (-1.95%)
  • Commodity: momentum, trend following, and term structure strategies all rebounded from last week’s losses
  • Credit: credit exposures continued to gain, although high yield did underperform investment grade in developed markets
  • Equity: size factors gained in developed markets, while value factors fell in foreign markets
  • Fixed Income: term structure strategies declined modestly in the US but aggressively in Europe
  • Foreign Exchange: currency carry and momentum strategies dropped, but value factors rose
  • Multi-Asset: all of our multi-asset class momentum and trend following strategies gained
  • Real Estate: real estate securities materially underperformed small cap equities worldwide
  • Risk: most of our short volatility and variance factors rose, led by our short VIX futures strategy
  • Momentum: trend following and momentum strategies profited both within and across asset classes

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December 2016 Projection Review

  • All 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 0.98% in December, 0.31% more than our initial projection of 0.67%
  • As of this moment, we correctly predicted the direction of 27 of 30 strategies
  • We were within 25 basis points for 11 indexes and within 50 basis points for 21
  • Our hit rate was about average but our accuracy was above average
  • 20 strategies performed better than we anticipated; nine performed worse
  • Most accurate: Distressed Securities (exact), Equity Market Neutral (within 4 basis points) and Emerging Markets (within 5 bps)
  • Least accurate: Europe (1.13% better than expected), Equity Short-Bias (1.01% worse) and Equity Value (0.98% better)
  • Overall, our projections were 87% more accurate than naive forecasts

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