EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: February 27, 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 losses in foreign stocks and energy-related equities stifled returns
  • Hedge funds are now up 1.00% for the month and 2.03% for the year
  • 11 of the 30 hedge fund strategies we track earned positive returns
  • Aside from European equities, most asset classes worldwide posted modest gains
  • Equities gained in most sectors and non-European regions
  • Bonds rose globally, but the largest risk-adjusted gains came in the US
  • Gold gained, but agricultural sector underperformance caused commodities as a whole to lag
  • Both developed and emerging market currencies appreciated against the dollar
  • Most of our short volatility and variance factors rose
  • Outside of commodities, momentum and trend following strategies tended to decline
  • We currently estimate that hedge funds returned 1.02% in January, 0.13% more than our initial projection of 0.89%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.14% last week as losses in foreign stocks and energy-related equities stifled returns
  • Hedge funds are now up 1.00% for the month and 2.03% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.14%), alpha (0.06%) and fixed income term structure (0.04%)
  • It indicates negative weekly contributions from the spread between developed market equities and US equities (-0.15%), equity sector beta (-0.09%) and the spread between MLPs and REITs (-0.09%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.06%, 0.08% and -0.12%, respectively

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Strategy Performance

  • 11 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Managed Futures (0.47%), Emerging Asia (0.20%) and Convertible Arbitrage (0.11%)
  • Laggards: Energy (-0.75%), Emerging Europe (-0.62%) and Europe (-0.57%)
  • North American funds trailed both Asian and European funds
  • The spread between developed market equities and US equities was the most significant factor driving strategy returns
  • Alpha leaders: Managed Futures (0.18%), Commodities (0.17%) and Global Macro (0.09%)
  • Alpha laggards: Equity Short-Bias (-0.21%), Emerging Europe (-0.11%) and Latin America (-0.07%)

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Global Benchmarks

  • Aside from European equities, most asset classes worldwide posted modest gains
  • Leaders: US utilities equity (3.83%), US REITs (1.97%) and US risk parity (1.85%)
  • Laggards: US MLPs (-1.90%), US energy equity (-1.48%) and agricultural commodities (-1.42%)
  • Equities: equities gained in most sectors and non-European regions
  • Bonds: bonds rose globally, but the largest risk-adjusted gains came in the US
  • Real Estate: US REITs were among the best performing assets
  • Commodities: gold gained, but agricultural sector underperformance caused commodities as a whole to lag
  • Currencies: both developed and emerging market currencies appreciated against the dollar
  • Multi-Asset: all of our multi-asset class benchmarks rose, with risk parity materially 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: VIX futures term structure (2.44%), the spread between US utilities equity and the market (2.31%) and the spread between developed market real estate securities and small cap equities (1.82%)
  • Laggards: 1-year US sector momentum (-1.97%), 1-year developed market equity sector momentum (-1.81%) and the spread between US energy equity and the market (-1.57%)
  • Commodity: momentum, trend following and term structure strategies all gained
  • Credit: duration-matched credit factors largely underperformed, but the losses were small
  • Equity: size, value and momentum factors declined across developed markets
  • Fixed Income: term structure strategies rose in both the US and Europe
  • Foreign Exchange: all of our alternative currency factors posted gains
  • Multi-Asset: each of our multi-asset class trend following and momentum strategies declined modestly
  • Real Estate: real estate securities outperformed small cap equities worldwide
  • Risk: most of our short volatility and variance factors rose, led by our VIX term structure strategy
  • Momentum: outside of commodities, momentum and trend following strategies tended to decline

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January 2017 Projection Review

  • All 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 1.02% in January, 0.13% more than our initial projection of 0.89%
  • As of this moment, we correctly predicted the direction of 28 of 30 strategies
  • We were within 25 basis points for 13 indexes and within 50 basis points for 16
  • Our hit rate was above average but our accuracy was about average
  • 22 strategies performed better than we anticipated; seven performed worse
  • Most accurate: Multi-Strategy (exact), Commodities (within 2 basis points) and Convertible Arbitrage (within 5 bps)
  • Least accurate: Emerging Europe (2.48% better than expected), Latin America (2.18% better) and Equity Long Only (1.48% better)
  • Overall, our projections were 83% more accurate than naive forecasts

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