EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: January 2017

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 0.89% in January as rising equities lifted returns
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Equities rose globally and foreign assets benefited from a depreciating dollar
  • Equities gained in all regions and styles and in most sectors
  • Bonds posted modest gains in the US, but rose materially overseas
  • Most commodity sectors notched healthy gains, but energy losses drove our broad index downward
  • Developed and emerging market currencies both appreciated significantly against the dollar
  • All of our short volatility and variance factors rose
  • Short-term momentum and trend following strategies struggled both within and across asset classes
  • 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 0.89% in January as rising equities lifted returns
  • Our factor attribution analysis suggests positive monthly contributions from equity beta (0.43%), equity sector beta (0.27%) and the spread between developed market equities and US equities (0.21%)
  • It indicates negative monthly contributions from alpha (-0.55%), equity region beta (-0.12%) and fixed income term structure (-0.11%)

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (3.42%), Emerging Asia (2.92%) and Equity Growth (2.25%)
  • Laggards: Equity Short-Bias (-1.16%), Managed Futures (-0.60%) and Global Macro (0.17%)
  • North American funds outperformed both Asian and European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Equity Short-Bias (0.78%), Equity Market Neutral (-0.02%) and Fixed Income Arbitrage (-0.07%)
  • Alpha laggards: Equity Long Only (-1.56%), Energy (-1.52%) and Managed Futures (-1.29%)

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Global Benchmarks

  • Equities rose globally and foreign assets benefited from a depreciating dollar
  • Leaders: base metals (8.12%), Latin America equity (7.64%) and precious metals (5.74%)
  • Laggards: energy commodities (-4.92%), US energy equity (-3.36%) and oil futures (-3.22%)
  • Equities: equities gained in all regions and styles and in most sectors
  • Bonds: bonds posted modest gains in the US, but rose materially overseas
  • Real Estate: real estate securities stumbled domestically but rose abroad
  • Commodities: most commodity sectors notched healthy gains, but energy losses drove our broad index downward
  • Currencies: developed and emerging market currencies both appreciated significantly against the dollar
  • Multi-Asset: all of our multi-asset class benchmarks rose, with risk parity strategies outperforming 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: short short-dated VIX futures (4.09%), the spread between US information technology equity and the market (3.49%) and 1-year developed market equity country momentum (3.46%)
  • Laggards: 1-month commodity momentum (-6.82%), 1-month commodity sector momentum (-5.17%) and the spread between 10-year and 1-year European government bonds (-4.62%)
  • Commodity: short-term momentum and trend following strategies suffered heavy losses
  • Credit: credit risk earned positive returns regardless of region and creditworthiness
  • Equity: size factors fell in most markets, while value factors fell globally
  • Fixed Income: term structure strategies gained modestly in the US but stumbled in Europe
  • Foreign Exchange: currency carry, momentum, all values strategies all declined
  • Multi-Asset: only our medium-term multi-asset class momentum factor rose
  • Real Estate: real estate securities materially underperformed small cap equities worldwide
  • Risk: all of our short volatility and variance factors rose, led by our short VIX futures strategy
  • Momentum: short-term momentum and trend following strategies struggled 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
  • Hedge funds returned 0.98% in December, 0.31% more than our initial projection of 0.67%
  • We correctly predicted the direction of 27 of 30 strategies
  • We were within 25 basis points for 13 indexes and within 50 basis points for 22
  • Our hit rate was about average but our accuracy was above average
  • 20 strategies performed better than we anticipated; 10 performed worse
  • Most accurate: Distressed Securities (within 4 basis points), Equity Market Neutral (within 5 bps) and Emerging Markets (within 6 bps)
  • Least accurate: Europe (1.10% better than expected), Equity Value (0.98% better) and Energy (0.91% better)
  • Overall, our projections were 88% more accurate than naive forecasts

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