EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: March 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 0.43% in March as foreign equity gains lifted returns
  • Hedge funds are now up 2.40% for the year
  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Although global asset returns were relatively modest, a depreciating dollar prompted healthy returns to foreign denominated assets for USD-based investors
  • Equities were nearly flat in the US, but fared much better overseas
  • Bonds were mostly down worldwide after adjusting for currency effects
  • Commodities struggled as oil futures plummeted 7.26%
  • Both developed and emerging market currencies appreciated against the dollar, helping to fuel foreign asset performance
  • Most of our short volatility and variance factors earned positive returns
  • Momentum and trend following strategies tended to struggle both within and across asset classes
  • 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 0.43% in March as foreign equity gains lifted returns
  • Hedge funds are now up 2.40% for the year
  • Our factor attribution analysis suggests positive monthly contributions from the spread between developed market equities and US equities (0.42%), lagged credit (0.06%) and the risk-free rate (0.03%)
  • It indicates negative monthly contributions from equity size (-0.06%), agricultural commodity beta (-0.05%) and currency momentum (-0.04%)
  • It estimates month-to-date and year-to-date alphas of 0.03% and 0.06%, respectively

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Strategy Performance

  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Asia (2.23%), Emerging Markets (1.32%), and Technology (1.05%)
  • Laggards: Managed Futures (-1.14%), Equity Short-Bias (-1.04%), and Energy (-0.64%)
  • 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: Healthcare (0.41%), Technology (0.19%), and Fixed Income Arbitrage (0.18%)
  • Alpha laggards: Managed Futures (-0.52%), Energy (-0.48%), and Fund of Funds (-0.21%)

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Global Benchmarks

  • Global asset returns were relatively modest in local currency terms, but a depreciating dollar led to strong foreign asset gains for USD-based investors
  • Leaders: developed Europe equity (4.01%), emerging Asia equity (3.29%), and developed ex-US equity (2.60%)
  • Laggards: oil futures (-7.26%), agricultural commodities (-5.35%), and energy commodities (-4.63%)
  • Equities: Equities were nearly flat in the US with mixed performance across sectors. Foreign equities fared much better, rising 2.60% in developed markets and 2.45% in emerging markets. Developed Europe posted the best performance, with a 4.01% gain.
  • Bonds: Bonds were mostly down in the US. Foreign bonds performed much more favorably, but these gains came largely from currency moves. Most foreign fixed income securities were down in their local currencies.
  • Real Estate: REITs stumbled in the US, falling 2.45%. Foreign real estate rose, but the returns were modest after adjusting for currency effects.
  • Commodities: Commodities struggled as oil futures plummeted 7.26%. Every sector fell, with agricultural commodities taking the largest hit, a 5.35% loss. Although precious metals also dropped, gold managed to limit its losses to 0.43%.
  • Currencies: Both developed and emerging market currencies appreciated against the dollar, helping to fuel foreign asset performance for USD-based investors. Developed currencies rose 0.63% and emerging currencies gained 1.19%.
  • Multi-Asset: Our global multi-asset class benchmarks handily outperformed our US indexes. Risk parity strategies beat 60/40 globally, but trailed domestically.

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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 consumer discretionary equity and the market (3.63%), the spread between developed market and US equity indexes (3.26%), and the spread between US information technology equity and the market (3.21%)
  • Laggards: 1-year developed market equity country momentum (-3.42%), US equity index value (-3.12%), and the spread between US financials equity and the market (-2.84%)
  • Commodity: Almost all of our alternative commodity betas posted losses, with medium-term momentum, trend following, and term structure strategies each declining more than 1% risk-adjusted.
  • Credit: Most of our credit factors earned modestly positive returns. Investment grade tended to outperform both sovereign and high yield corporate bonds
  • Equity: Value stocks materially underperformed growth stocks worldwide and small caps trailed large caps in developed markets. Trend following strategies performed well across global equity indexes, but momentum factors struggled across that same universe.
  • Fixed Income: Term structure strategies declined both in the US and in Europe while 10-year TIPS underperformed 10-year Treasuries by 0.84%.
  • Foreign Exchange: Our currency carry and momentum factors both posted large losses of 1.96% and 1.50%, respectively. Currency value fared much better, gaining 0.40%.
  • 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 about 1.50% both in the US and abroad.
  • Risk: Most of our short volatility and variance factors earned positive returns, but our VIX term structure strategy suffered a 2.76% decline.
  • Momentum: Momentum and trend following strategies tended to struggle both within and across asset classes. Country equity index trend following factors were the only ones to post strong gains.

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February 2017 Projection Review

  • All of the indexes underlying our composite indexes have reported February returns
  • Hedge funds returned 0.95% in February, 0.26% less than our initial projection of 1.21%
  • 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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