EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: April 3, 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 0.34% last week as US equity gains lifted returns
  • Hedge funds are now up 0.43% for the month and 2.40% for the year
  • All but three of the 30 hedge fund strategies we track earned positive returns
  • Oil prices soared and US equities rebounded, but most asset classes worldwide earned limited returns
  • Equities rebounded in the US, but foreign equities and emerging Europe, in particular, did not fare so well
  • US high yield followed equities upward, but most bond indexes produced only modest returns
  • Oil futures spiked, gaining 5.50% for the week and lifting our broad commodity index to a profit
  • Both developed and emerging market currencies depreciated against the dollar
  • Most of our short volatility and variance factors earned positive returns
  • Returns to momentum and trend following strategies varied by asset class, but were typically small
  • We now estimate that hedge funds returned 0.95% in February, 0.26% less than our initial projection of 1.21%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.34% last week as US equity gains lifted returns
  • Hedge funds are now up 0.43% for the month and 2.40% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.23%), equity sector beta (0.05%) and lagged credit (0.04%)
  • It indicates negative weekly contributions from the spread between developed market equities and US equities (-0.14%), the spread between emerging market and developed market equities (-0.05%) and alpha (-0.03%)
  • It estimates weekly, month-to-date, and year-to-date alphas of -0.03%, 0.03%, and 0.06%, respectively

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Strategy Performance

  • All but three of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Energy (1.29%), Healthcare (0.91%), and Equity Long Only (0.78%)
  • Laggards: Equity Short-Bias (-1.13%), Emerging Europe (-0.22%), and Emerging Markets (-0.05%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Asia (0.16%), Special Situations (0.15%), and Emerging Asia (0.13%)
  • Alpha laggards: Managed Futures (-0.13%), Credit (-0.12%), and Equity Growth (-0.10%)

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Global Benchmarks

  • Oil prices soared and US equities rebounded, but most asset classes worldwide earned limited returns
  • Leaders: oil futures (5.50%), energy commodities (4.84%), and US energy equity (2.52%)
  • Laggards: emerging EMEA equity (-4.28%), US utilities equity (-0.99%), and agricultural commodities (-0.96%)
  • Equities: Equities rebounded in the US, gaining 0.99% as most sectors rose. Foreign equities did not fare so well, gaining modestly in developed markets and falling in emerging markets. Emerging Europe suffered a particularly large 4.28% decline.
  • Bonds: US high yield followed equities upward, gaining 0.91%. Most other bond indexes produced only modest returns, however.
  • Real Estate: Real estate securities gained 0.78% in the US, but fell 0.35% abroad.
  • Commodities: Oil prices spiked, gaining 5.50% for the week and lifting our broad commodity index to a profit. Other commodity sectors were less volatile. Base and precious metals both gained around 0.4% while agricultural commodities stumbled, losing 0.96%.
  • Currencies: Both developed and emerging market currencies depreciated against the dollar, but the losses were less than half a percent.
  • Multi-Asset: All of our multi-asset class benchmarks rose, but US-centric indexes outperformed global indexes. Risk parity strategies outperformed 60/40 in the US, but trailed globally.

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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 size (2.13%), US equity index size (1.87%), and 1-year commodity sector momentum (1.76%)
  • Laggards: VIX futures term structure (-2.01%), the spread between US listed private equity and small cap equity (-1.63%), and the spread between US utilities equity and the market (-1.36%)
  • Commodity: Term structure strategies struggled, losing 1.11%. Medium-term momentum, however, posted strong returns in excess of 1%.
  • Credit: Aside from US high yield, which outperformed investment grade by 1.32%, returns to most credit strategies were modest.
  • Equity: Value, size, and momentum factors all gained more than 1% in the US. Foreign size and value factors were mostly down, however.
  • Fixed Income: Term structure strategies gained 1.20% in Europe, but netted only small profits in the US. Inflation-linked securities underperformed nominal bonds.
  • Foreign Exchange: Our currency carry factor rose 1.19%. Value also posted a healthy 0.61% gain, but momentum fell.
  • Multi-Asset: Our multi-asset class momentum and trend following factors notched mixed, but muted performance, each rising or falling by 0.25% or less.
  • Real Estate: Real estate securities materially underperformed small cap equities worldwide, trailing by nearly 1% in the US.
  • Risk: Most of our short volatility and variance factors earned positive returns, but our VIX term structure strategy suffered a large 2.01% decline.
  • Momentum: Returns to momentum and trend following strategies varied by asset class, but were generally modest.

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February 2017 Projection Review

  • All 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 0.95% in February, 0.26% 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 13 indexes and within 50 basis points for 25
  • Both our hit rate and our accuracy were above average
  • Six strategies performed better than we anticipated; 24 performed worse
  • Most accurate: Credit (within 4 basis points), Technology (within 9 bps), and Merger Arbitrage (within 9 bps)
  • Least accurate: Emerging Europe (2.47% worse than expected), Energy (2.18% worse), and Commodities (0.68% worse)
  • Overall, our projections were 80% more accurate than naive forecasts

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