EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: February 20, 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 0.30% last week as rising equities once again lifted returns
  • Hedge funds are now up 1.09% for the month and 2.02% for the year
  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Equity strength overcame tepid performance in other asset classes, leading to healthy returns for diversified investors
  • Equities gained in every major region and in most sectors
  • Government bonds declined modestly in the US, but corporate bonds and foreign assets rose
  • Commodities stumbled as every sector except precious metals fell
  • Emerging market currencies appreciated against the dollar while developed currencies depreciated slightly
  • Most of our short volatility and variance factors rose
  • Momentum and trend following strategies tended to decline within asset classes but rise across asset classes
  • We currently estimate that hedge funds returned 0.92% in January, 0.03% more than our initial projection of 0.89%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.30% last week as rising equities once again lifted returns
  • Hedge funds are now up 1.09% for the month and 2.02% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.34%), multi-asset class momentum (0.06%) and equity sector beta (0.04%)
  • It indicates negative weekly contributions from the spread between developed market equities and US equities (-0.12%), alpha (-0.03%) and equity size (-0.03%)
  • It estimates weekly, month-to-date and year-to-date alphas of -0.03%, 0.05% and -0.14%, respectively

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Strategy Performance

  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (0.82%), Equity Long Only (0.77%) and Equity Value (0.64%)
  • Laggards: Equity Short-Bias (-0.77%), Energy (-0.60%) and Commodities (-0.06%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Managed Futures (0.36%), Commodities (0.21%) and Special Situations (0.14%)
  • Alpha laggards: Equity Growth (-0.10%), Energy (-0.09%) and Fund of Funds (-0.06%)

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Global Benchmarks

  • Equity strength overcame tepid performance in other asset classes, leading to healthy returns for diversified investors
  • Leaders: US healthcare equity (2.53%), US financials equity (2.41%) and US information technology equity (1.89%)
  • Laggards: energy commodities (-1.91%), US energy equity (-1.87%) and base metals (-1.55%)
  • Equities: equities gained in every major region and in most sectors
  • Bonds: government bonds declined modestly in the US, but corporate bonds and foreign assets rose
  • Real Estate: real estate securities posted small gains both in the US and abroad
  • Commodities: commodities stumbled as every sector except precious metals fell
  • Currencies: Emerging market currencies appreciated against the dollar while developed currencies depreciated slightly
  • Multi-Asset: all of our multi-asset class benchmarks rose more or less in line with each other

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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: 1-month US sector momentum (1.31%), the spread between US healthcare equity and the market (1.14%) and the spread between US financials equity and the market (1.06%)
  • Laggards: VIX futures term structure (-3.39%), the spread between US energy equity and the market (-2.50%) and US equity size (-1.34%)
  • Commodity: term structure strategies gained, but trend following and momentum factors fell
  • Credit: credit factors produced modest, but generally positive, returns
  • Equity: most of our size, value, and momentum factors finished down
  • Fixed Income: term structure strategies declined in the US, but rose in Europe
  • Foreign Exchange: all of our alternative currency factors declined
  • Multi-Asset: each of our multi-asset class trend following and momentum strategies gained
  • Real Estate: real estate securities underperformed small cap equities worldwide
  • Risk: most of our short volatility and variance factors rose, but our VIX term structure strategy struggled
  • Momentum: momentum and trend following strategies tended to decline within asset classes but rise 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 0.92% in January, 0.03% more than our initial projection of 0.89%
  • As of this moment, we correctly predicted the direction of 29 of 30 strategies
  • We were within 25 basis points for 14 indexes and within 50 basis points for 21
  • Both our hit rate and our accuracy were above average
  • 21 strategies performed better than we anticipated; seven performed worse
  • Most accurate: Commodities (exact), Multi-Strategy (exact) and Hedge Funds (within 3 basis points)
  • Least accurate: Equity Long Only (1.59% better than expected), Technology (1.10% better) and Healthcare (1.08% better)
  • Overall, our projections were 89% more accurate than naive forecasts

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