EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: March 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 fell 0.32% last week as gains from foreign equities could not offset widespread losses from other factors
  • Hedge funds are now down 0.15% for the month and up 1.90% for the year
  • Only three of the 30 hedge fund strategies we track earned positive returns
  • For the second straight week, most asset classes worldwide declined, leaving investors with little room to avoid losses
  • Equities gained modestly in foreign developed markets, but were down broadly elsewhere
  • Every one of our fixed income benchmarks fell
  • Each commodity sector dropped as oil futures plummeted more than 9%
  • Emerging market currencies depreciated against the dollar, while developed market currencies appreciated modestly
  • Most of our short volatility and variance factors rose, but the profits were small
  • Trend following strategies declined within and across most asset classes
  • We currently estimate that hedge funds returned 1.03% in February, 0.18% less than our initial projection of 1.21%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.32% last week as gains from foreign equities could not offset widespread losses from other factors
  • Hedge funds are now down 0.15% for the month and up 1.90% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and US equities (0.15%), alpha (0.03%) and the spread between MLPs and REITs (0.02%)
  • It indicates negative weekly contributions from equity beta (-0.15%), fixed income term structure (-0.09%) and commodity momentum (-0.05%)
  • It estimates weekly, month-to-date and year-to-date alphas of 0.03%, 0.10% and 0.20%, respectively

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Strategy Performance

  • Only three of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Equity Short-Bias (0.66%), Asia (0.37%) and Emerging Asia (0.13%)
  • Laggards: Energy (-1.75%), Emerging Europe (-1.60%) and Latin America (-1.32%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Managed Futures (0.42%), Healthcare (0.17%) and Credit (0.17%)
  • Alpha laggards: Latin America (-0.26%), Energy (-0.14%) and Special Situations (-0.11%)

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Global Benchmarks

  • For the second straight week, most asset classes worldwide declined, leaving investors with little room to avoid losses
  • Leaders: developed Asia-Pacific equity (0.56%), US information technology equity (0.50%) and developed Europe equity (0.36%)
  • Laggards: oil futures (-9.03%), energy commodities (-6.64%) and US REITs (-4.54%)
  • Equities: equities gained modestly in foreign developed markets, but were down broadly elsewhere. Eight of ten sectors in the US declined, with only Healthcare and Information Technology eking out gains. Energy and MLPs stumbled to losses of around 3%.
  • Bonds: every one of our fixed income benchmarks fell, with US high yield declining the most on both an absolute and risk-adjusted basis
  • Real Estate: real estate securities declined worldwide, but were particularly hard hit in the US, where they fell more than 4.5%
  • Commodities: every commodity sector dropped as oil futures plummeted more than 9%. Agricultural commodities lost more than 3.4%, while base metals and precious metals both fell at least 2.45%
  • Currencies: developed market currencies appreciated slightly against the dollar while emerging market currencies depreciated by about half a percent
  • Multi-Asset: all of our multi-asset class benchmarks struggled, but leveraged bond exposure led risk parity strategies to materially greater losses than 60/40 strategies

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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 emerging market equity sector momentum (2.25%), the spread between developed market real estate securities and US REITs (2.11%) and the spread between US listed private equity and small cap equity (2.01%)
  • Laggards: oil futures (-2.88%), the spread between 10-year and 1-year European government bonds (-2.79%) and the spread between US REITs and equities (-2.74%)
  • Commodity: term structure was nearly flat, but trend following and medium-term momentum strategies declined between 1.67% and 2.26% as commodity betas stumbled
  • Credit: foreign high yield gained 1.61% in excess of investment grade, but most credit factors fell. US investment grade underperformed government bonds by around 0.30% at both short and long durations.
  • Equity: size and value factors produced negligible returns in developed markets overseas, but were heavy losers in the US. Small cap and value indexes underperformed large cap and growth indexes by 2.23% and 1.63%, respectively. Short-term momentum strategies tended to produce profits, but medium-term momentum strategies generated losses.
  • Fixed Income: term structure strategies struggled, losing around 1% in the US risk-adjusted and nearly 3% in Europe
  • Foreign Exchange: most of our alternative currency factors fell, with carry dropping 0.96% and momentum falling 0.82%
  • Multi-Asset: all of our multi-asset class factors declined. Losses in momentum strategies were relatively modest, but trend following gave up 1.29%.
  • Real Estate: real estate securities underperformed small cap equities by more than 1% worldwide
  • Risk: most of our short volatility and variance factors rose, but the profits were small
  • Momentum: trend following strategies declined within and across most asset classes. Momentum tended to fare better, but performance was nevertheless mixed.

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February 2017 Projection Review

  • Most of the indexes underlying our composite indexes have reported February returns, but our analysis is still preliminary and subject to change
  • We currently estimate that hedge funds returned 1.03% in February, 0.18% less than our initial projection of 1.21%
  • As of this moment, we correctly predicted the direction of 28 of 30 strategies
  • We were within 25 basis points for 18 indexes and within 50 basis points for 23
  • Both our hit rate and our accuracy were above average
  • 10 strategies performed better than we anticipated; 19 performed worse
  • Most accurate: Merger Arbitrage (exact), Credit (within 1 basis point) and Convertible Arbitrage (within 3 bps)
  • Least accurate: Energy (1.97% worse than expected), Emerging Europe (1.23% worse) and Commodities (1.14% worse)
  • Overall, our projections were 85% more accurate than naive forecasts

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