EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: February 13, 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 0.29% last week as rising equities lifted returns
  • Hedge funds are now up 0.72% for the month and 1.66% for the year
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Domestic securities outperformed their foreign equivalents in most asset classes
  • Equities lagged in Europe, but gained in most other regions and sectors
  • Fixed income securities were up broadly in the US
  • Most commodity sectors gained, led by base metals
  • Developed market currencies depreciated against the dollar while emerging currencies held even
  • All of our short volatility and variance factors rose
  • Momentum and trend following strategies tended to gain both within and across asset classes
  • We currently estimate that hedge funds returned 0.93% in January, 0.04% more than our initial projection of 0.89%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.29% last week as rising equities lifted returns
  • Hedge funds are now up 0.72% for the month and 1.66% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.19%), the spread between emerging market and developed market equities (0.05%) and alpha (0.05%)
  • It indicates negative weekly contributions from the spread between developed market equities and US equities (-0.13%), equity region beta (-0.04%) and the spread between MLPs and REITs (-0.03%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.05%, 0.01% and -0.10%, respectively

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Asia (1.03%), Latin America (0.73%) and Emerging Markets (0.65%)
  • Laggards: Equity Short-Bias (-0.66%), Emerging Europe (-0.07%) and Energy (0.02%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Healthcare (0.22%), Emerging Asia (0.17%) and Fixed Income Arbitrage (0.09%)
  • Alpha laggards: Managed Futures (-0.22%), Special Situations (-0.08%) and Energy (-0.08%)

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Global Benchmarks

  • Domestic securities outperformed their foreign equivalents in most asset classes
  • Leaders: base metals (4.24%), emerging Asia equity (1.82%) and US risk parity (1.66%)
  • Laggards: developed ex-US government bonds (-0.97%), developed Europe equity (-0.59%) and US MLPs (-0.57%)
  • Equities: equities lagged in Europe, but gained in most other regions and sectors
  • Bonds: fixed income securities were up broadly in the US, but European government bonds underperformed
  • Real Estate: real estate securities rose both in the US and abroad
  • Commodities: energy commodities were flat, but all the other major sectors gained, led by base metals
  • Currencies: developed market currencies depreciated against the dollar while emerging currencies held even
  • Multi-Asset: all of our multi-asset class benchmarks rose, with US-centric portfolios outperforming global portfolios

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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: emerging market equity value (2.46%), the spread between emerging market and US government bonds (1.75%) and VIX futures term structure (1.74%)
  • Laggards: the spread between developed market and US government bonds (-1.87%), the spread between emerging European and emerging market equity (-1.71%) and the spread between global and US aggregate bonds (-1.67%)
  • Commodity: term structure, trend following, and momentum factors all gained
  • Credit: credit factors produced mixed, but muted results
  • Equity: size factors rose modestly worldwide while value factors fell in developed markets
  • Fixed Income: term structure strategies gained modestly both in the US and in Europe
  • Foreign Exchange: all of our alternative currency factors produced gains
  • Multi-Asset: each of our multi-asset class trend following and momentum strategies rose
  • Real Estate: real estate securities outperformed small cap equities worldwide
  • Risk: all of our short volatility and variance factors rose, led by our VIX term structure strategy
  • Momentum: momentum and trend following strategies tended to gain both within and across asset classes

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January 2017 Projection Review

  • Most of the indexes underlying our composite indexes have reported January returns, but our analysis is still preliminary and subject to change
  • We currently estimate that hedge funds returned 0.93% in January, 0.04% more than our initial projection of 0.89%
  • As of this moment, we correctly predicted the direction of 30 of 30 strategies
  • We were within 25 basis points for 15 indexes and within 50 basis points for 21
  • Both our hit rate and our accuracy were above average
  • 19 strategies performed better than we anticipated; 10 performed worse
  • Most accurate: Fund of Funds (exact), Equity Short-Bias (within 1 basis point) and Commodities (within 4 bps)
  • Least accurate: Equity Long Only (1.44% better than expected), Latin America (1.27% better) and Technology (0.90% better)
  • Overall, our projections were 90% more accurate than naive forecasts

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