EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: March 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 0.52% last week as worldwide equity gains lifted returns
  • Hedge funds are now up 0.38% for the month and 2.40% for the year
  • All but one of the 30 hedge fund strategies we track earned positive returns
  • After two weeks of declines, markets rebounded with strong performance in every major asset class
  • Equities rallied overseas, particularly in emerging markets, gaining more than 4% in emerging Asia and 5% in emerging Europe
  • Every one of our fixed income benchmarks rose, reversing last week’s losses
  • Base metals gained more than 3% and precious metals added more than 2% as all commodity sectors rose
  • Both developed and emerging market currencies appreciated materially against the dollar
  • Most of our short volatility and variance factors rose, but profits were modest
  • Trend following factors gained both within and across asset classes
  • We now estimate that hedge funds returned 0.99% in February, 0.22% less than our initial projection of 1.21%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.52% last week as worldwide equity gains lifted returns
  • Hedge funds are now up 0.38% for the month and 2.40% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and US equities (0.26%), equity beta (0.11%) and the spread between emerging market and developed market equities (0.09%)
  • It indicates negative weekly contributions from alpha (-0.08%), the spread between MLPs and REITs (-0.04%) and developed currencies (-0.04%)
  • It estimates weekly, month-to-date, and year-to-date alphas of -0.08%, 0.04%, and 0.10%, respectively

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Strategy Performance

  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Asia (2.14%), Emerging Europe (2.12%), and Emerging Markets (1.47%)
  • Laggards: Equity Short-Bias (-0.80%), Fixed Income Arbitrage (0.13%), and Equity Market Neutral (0.15%)
  • 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: Latin America (0.15%), Healthcare (0.13%), and Equity Short-Bias (0.09%)
  • Alpha laggards: Managed Futures (-0.56%), Energy (-0.18%), and Global Macro (-0.16%)

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Global Benchmarks

  • After two weeks of declines, markets rebounded with strong performance in every major asset class
  • Leaders: emerging EMEA equity (5.00%), emerging Asia equity (4.16%), and emerging market equity (4.05%)
  • Laggards: US healthcare equity (-0.64%), US MLPs (-0.63%), and US financials equity (-0.29%)
  • Equities: equities rallied overseas, particularly in emerging markets, gaining more than 4% in emerging Asia and 5% in emerging Europe. Gains were much smaller, but still positive in the United States, where most sectors and styles rose.
  • Bonds: every one of our fixed income benchmarks rose, reversing last week’s losses. Government bonds outperformed on both an absolute and risk-adjusted basis, with US Treasuries gaining 0.41% and European government bonds adding 1.55%.
  • Real Estate: real estate securities profited worldwide, rising by more than 2% both in the US and overseas.
  • Commodities: base metals gained more than 3% and precious metals added more than 2% as all commodity sectors rose, leading our broad commodity index to a 0.92% gain.
  • Currencies: both developed and emerging market currencies appreciated materially against the dollar, with each adding around 1%.
  • Multi-Asset: all of our multi-asset class benchmarks notched healthy gains, but leveraged bond exposure led risk parity strategies to materially greater returns 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: US equity index size (2.17%), the spread between emerging and developed market equity (2.11%), and emerging market currencies (1.97%)
  • Laggards: the spread between US healthcare equity and the market (-1.20%), currency value (-1.16%), and the spread between US MLPs and REITs (-1.13%)
  • Commodity: all of our alternative commodity betas gained, with term structure and trend following each surpassing 1%. Medium-term momentum strategies eked out smaller, but nevertheless positive, returns.
  • Credit: most credit factors fell, especially after adjusting for duration. Foreign high yield was the worst performer, lagging foreign investment grade credit by 0.92% risk-adjusted.
  • Equity: size factors gained in developed markets but fell in emerging markets. The opposite was true for value factors. Medium-term momentum strategies were roughly flat in the US. Trend following strategies among country indexes were among the best performing equity factors, gaining 1.35% in developed markets and 1.82% in emerging markets.
  • Fixed Income: term structure strategies performed well, particularly in the US, where each of our spread factors gained at least 1% risk-adjusted. Returns in Europe were smaller, but still positive. Inflation-linked securities outperformed nominal bonds as well.
  • Foreign Exchange: performance among our alternative currency factors was mixed, with carry and value each declining while momentum gained 1.64%.
  • Multi-Asset: all of our multi-asset class factors rose, with short-term and medium-term momentum strategies each adding nearly 1%. Trend following was the best performing factor, rising 1.77%.
  • Real Estate: real estate securities outperformed small cap equities worldwide, adding 0.27% in the US and 0.55% in foreign markets.
  • Risk: most of our short volatility and variance factors rose, but profits were modest. Our short VIX futures strategy led the way with a 0.99% gain.
  • Momentum: momentum factors produced mixed results, but trend following factors rose broadly, both within and across asset classes.

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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 now estimate that hedge funds returned 0.99% in February, 0.22% less than our initial projection of 1.21%
  • As of this moment, we correctly predicted the direction of 29 of 30 strategies
  • We were within 25 basis points for 18 indexes and within 50 basis points for 25
  • Both our hit rate and our accuracy were above average
  • Seven strategies performed better than we anticipated; 23 performed worse
  • Most accurate: Equity Long Only (within 4 basis points), Convertible Arbitrage (within 4 bps), and Merger Arbitrage (within 8 bps)
  • Least accurate: Energy (1.64% worse than expected), Emerging Europe (1.44% worse), and Latin America (1.10% better)
  • Overall, our projections were 87% more accurate than naive forecasts

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