EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: March 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 0.32% last week as US equity losses crippled returns
  • Hedge funds are now up 0.02% for the month and 1.98% for the year
  • Only six of the 30 hedge fund strategies we track earned positive returns
  • Equities stumbled in the US, giving back recent gains, but strong fixed income performance worldwide helped to offset losses
  • Equities were flat to modestly positive overseas, but strongly negative in the US as nearly every sector and style fell
  • Bonds benefited from equity declines as each of our government and investment grade benchmarks rose
  • Precious metals added 1.58%, but every other commodity sector fell as our broad index lost 1.03%
  • Both developed and emerging market currencies appreciated against the dollar
  • All of our short volatility and variance factors declined
  • Momentum and trend following strategies mostly fell, both within and across asset classes
  • We now estimate that hedge funds returned 0.94% in February, 0.27% 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 US equity losses crippled returns
  • Hedge funds are now up 0.02% for the month and 1.98% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and US equities (0.26%), fixed income term structure (0.06%) and the spread between emerging market and developed market equities (0.02%)
  • It indicates negative weekly contributions from equity beta (-0.37%), equity sector beta (-0.05%) and multi-asset class momentum (-0.04%)
  • It estimates weekly, month-to-date, and year-to-date alphas of -0.04%, -0.02%, and 0.00%, respectively

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Strategy Performance

  • Only six of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Equity Short-Bias (1.01%), Latin America (0.35%), and Emerging Markets (0.11%)
  • Laggards: Healthcare (-1.05%), Equity Long Only (-0.88%), and Energy (-0.76%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Merger Arbitrage (0.15%), Distressed Securities (0.11%), and Credit (0.08%)
  • Alpha laggards: Managed Futures (-0.57%), Global Macro (-0.20%), and Commodities (-0.15%)

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Global Benchmarks

  • Equities stumbled in the US, giving back recent gains, but strong fixed income performance worldwide helped to offset losses
  • Leaders: precious metals (1.58%), gold futures (1.52%), and US utilities equity (1.14%)
  • Laggards: US financials equity (-3.23%), oil futures (-2.70%), and US small cap equity (-2.51%)
  • Equities: Equities were flat to modestly positive overseas, but strongly negative in the US. Financials fell 3.23% as all sectors except utilities declined. Style choices made little difference as large caps, small caps, value stocks, and growth stocks all finished in the red.
  • Bonds: Bonds benefited from equity declines as most major indexes rose. 10-year US Treasuries gained 0.94% while developed market government bonds added 1.09%. US high yield dipped by 0.08%, and was our only fixed income benchmark to suffer a loss. Investment grade bonds gained worldwide.
  • Real Estate: Real estate securities gained modestly both in the US and overseas, adding between 0.14% and 0.39%.
  • Commodities: Precious metals rose by 1.58%, but every other commodity sector fell as our broad index lost 1.03%. Oil futures declined by 2.70% while agricultural commodities dropped 2.44%.
  • Currencies: Both developed and emerging market currencies appreciated against the dollar, with each adding around 0.5%.
  • Multi-Asset: Our multi-asset class benchmarks produced mixed performance. 60/40 strategies fell, but risk parity strategies rose, benefiting from strong bond performance both in the US and abroad.

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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: the spread between US utilities equity and the market (1.91%), the spread between 10-year and 1-year European government bonds (1.79%), and the spread between US REITs and small cap equities (1.76%)
  • Laggards: the spread between US financials equity and the market (-1.89%), US equity size (-1.45%), and 1-year US sector momentum (-1.42%)
  • Commodity: Most of our alternative commodity betas declined with trend following and medium-term momentum strategies losing between 0.40% and 0.66%. Our term structure factor also dipped, but only by 0.06%.
  • Credit: Credit factors largely declined, particularly after adjusting for duration. High yield underperformed investment grade worldwide.
  • Equity: Value factors lagged both in developed and emerging markets. Size factors dropped in the US by more than 1.35%, but rose modestly elsewhere. Trend following and momentum factors posted mixed, but mostly negative, returns.
  • Fixed Income: Term structure strategies performed well, both in the US and in Europe, where 10-year/1-year spread strategies gained 1.26% and 1.79%, respectively. Inflation-linked securities outperformed nominal bonds worldwide.
  • Foreign Exchange: Our currency value factor rose 0.90%, but our carry and momentum factors fell by 1.05% and 0.50%, respectively.
  • Multi-Asset: All of our multi-asset class factors dropped, with medium-term momentum posting the largest loss, at 1.09%.
  • Real Estate: Real estate securities materially outperformed small cap equities in the US, earning an excess return of 1.76%. Real estate also outperformed overseas, but to a lesser extent.
  • Risk: All of our short volatility and variance factors declined, with our short VIX futures strategy posting the largest loss.
  • Momentum: Momentum and trend following strategies mostly fell, 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 0.94% in February, 0.27% 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 13 indexes and within 50 basis points for 26
  • Both our hit rate and our accuracy were above average
  • Seven strategies performed better than we anticipated; 22 performed worse
  • Most accurate: Credit (exact), Special Situations (within 1 basis point), and Convertible Arbitrage (within 3 bps)
  • Least accurate: Energy (1.93% worse than expected), Emerging Europe (1.44% worse), and Latin America (1.10% better)
  • Overall, our projections were 86% more accurate than naive forecasts

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