EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: February 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 1.21% in February as strong equity performance fueled returns
  • Hedge funds are now up 2.23% for the year
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • February was a strong month for investors as most asset classes worldwide rose
  • Equities gained in most sectors and regions, but lagged in Europe
  • Bonds rose globally, but the largest risk-adjusted gains came in the US
  • Gold rallied, but broad commodities barely gained as energy and agricultural commodities underperformed
  • Emerging market currencies appreciated against the dollar while developed currencies depreciated
  • Most of our short volatility and variance factors rose
  • Trend following strategies mostly gained, but momentum factors underperformed among equities and commodities
  • Hedge funds returned 1.01% in January, 0.12% more than our initial projection of 0.89%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 1.21% in February as strong equity performance fueled returns
  • Hedge funds are now up 2.23% for the year
  • Our factor attribution analysis suggests positive monthly contributions from equity beta (0.87%), alpha (0.23%) and fixed income term structure (0.09%)
  • It indicates negative monthly contributions from the spread between developed market equities and US equities (-0.39%), equity region beta (-0.05%) and the spread between MLPs and REITs (-0.04%)
  • It estimates month-to-date and year-to-date alphas of 0.23% and 0.26%, respectively

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (3.61%), Emerging Asia (2.28%) and Equity Long Only (1.92%)
  • Laggards: Equity Short-Bias (-1.77%), Energy (-0.09%) and Equity Market Neutral (0.30%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Healthcare (1.03%), Special Situations (0.63%) and Event Driven (0.52%)
  • Alpha laggards: Equity Market Neutral (-0.12%), Emerging Markets (-0.09%) and Equity Growth (0.01%)

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Global Benchmarks

  • February was a strong month for investors as most asset classes worldwide rose
  • Leaders: US healthcare equity (6.47%), US utilities equity (4.98%) and US information technology equity (4.96%)
  • Laggards: US energy equity (-2.41%), US telecommunications equity (-0.81%) and developed ex-US currencies (-0.67%)
  • Equities: equities gained in most sectors and regions, but lagged in Europe
  • Bonds: bonds rose globally, but the largest risk-adjusted gains came in the US
  • Real Estate: real estate securities rose worldwide and were the best performing major asset class
  • Commodities: gold rallied, but broad commodities barely gained as energy and agricultural commodities underperformed
  • Currencies: emerging market currencies appreciated against the dollar while developed currencies depreciated
  • 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: emerging market equity size (3.08%), the spread between 10-year and 1-year European government bonds (3.00%) and the spread between US healthcare equity and the market (2.94%)
  • Laggards: the spread between US energy equity and the market (-4.47%), the spread between US telecommunications equity and the market (-4.10%) and 1-year emerging market equity country momentum (-3.89%)
  • Commodity: trend following and term structure strategies gained, but medium-term momentum strategies fell
  • Credit: duration-matched credit factors performed strongly on a risk-adjusted basis
  • Equity: size, value and momentum factors struggled in 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 profited
  • Real Estate: real estate securities outperformed small cap equities worldwide
  • Risk: most of our short volatility and variance factors rose, led by our US buy-write index
  • Momentum: trend following strategies mostly gained, but momentum factors underperformed among equities and commodities

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January 2017 Projection Review

  • All of the indexes underlying our composite indexes have reported January returns
  • Hedge funds returned 1.01% in January, 0.12% more than our initial projection of 0.89%
  • We correctly predicted the direction of 28 of 30 strategies
  • We were within 25 basis points for 15 indexes and within 50 basis points for 17
  • 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 1 basis point) and Convertible Arbitrage (within 6 bps)
  • Least accurate: Emerging Europe (2.37% better than expected), Latin America (2.00% better) and Special Situations (1.52% better)
  • Overall, our projections were 83% more accurate than naive forecasts

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