EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: April 10, 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 0.04% last week as mixed, but muted factor performance led to modest returns
  • Hedge funds are now up 2.17% for the year
  • 14 of the 30 hedge fund strategies we track earned positive returns
  • Oil, real estate, and fixed income securities rose while developed market equities slipped
  • Equities fell globally despite small gains in defensive sectors and emerging markets
  • Aside from our short-term US Treasury index, all of our bond benchmarks posted positive returns
  • Oil prices rallied once again, gaining 3.26% and leading our broad commodity index to a 1.09% profit
  • Both developed and emerging market currencies depreciated against the dollar for the second straight week
  • Most of our short volatility and variance factors fell, but the losses were small
  • Performance among momentum and trend following strategies varied by asset class, but was generally modest
  • We now estimate that hedge funds returned 0.25% in March, 0.18% less than our initial projection of 0.43%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.04% last week as mixed, but muted factor performance led to modest returns
  • Hedge funds are now up 2.17% for the year
  • Our factor attribution analysis suggests positive weekly contributions from alpha (0.06%), the spread between emerging market and developed market equities (0.05%) and fixed income term structure (0.04%)
  • It indicates negative weekly contributions from equity beta (-0.09%), lagged credit (-0.04%) and the spread between developed market equities and US equities (-0.03%)
  • It estimates weekly and year-to-date alphas of 0.06% and -0.07%, respectively

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Strategy Performance

  • 14 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (0.50%), Equity Short-Bias (0.42%), and Emerging Europe (0.40%)
  • Laggards: Equity Value (-0.28%), Equity Long Only (-0.25%), and Healthcare (-0.25%)
  • North American funds outperformed both Asian and European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Emerging Asia (0.25%), Equity Value (0.20%), and Event Driven (0.17%)
  • Alpha laggards: Equity Short-Bias (-0.07%), Convertible Arbitrage (-0.04%), and Managed Futures (-0.02%)

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Global Benchmarks

  • Oil, real estate, and fixed income securities rose while developed market equities slipped
  • Leaders: oil futures (3.26%), energy commodities (3.17%), and Latin America equity (1.54%)
  • Laggards: US small cap equity (-1.36%), agricultural commodities (-0.95%), and US consumer discretionary equity (-0.90%)
  • Equities: Equities declined in developed markets and rose in emerging markets. US Defensive sectors actually gained, but the increases were not sufficient to offset losses in cyclical sectors. All of our US style indexes dropped, with small caps producing the largest loss.
  • Bonds: Aside from our short-term US Treasury index, all of our bond benchmarks posted positive returns. US high yield led the way with a 0.35% gain.
  • Real Estate: Real estate securities were among the week’s best performers, gaining 0.94% in the US and 1.12% abroad.
  • Commodities: Oil prices rose once again, gaining 3.26% and leading our broad commodity index to a 1.09% profit despite losses in agricultural commodities and base metals.
  • Currencies: Both developed and emerging market currencies depreciated against the dollar for the second straight week, but the losses were less than half a percent.
  • Multi-Asset: Most of our multi-asset class benchmarks fell, but the losses were modest. Risk parity strategies mildly outperformed 60/40 as fixed income gains offset equity losses.

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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 developed market real estate securities and equities (1.98%), the spread between developed market real estate securities and small cap equities (1.88%), and the spread between US REITs and small cap equities (1.47%)
  • Laggards: commodity term structure (-1.82%), developed market equity value (-1.46%), and US equity index size (-1.44%)
  • Commodity: Term structure strategies again struggled, losing 1.82%. Trend following strategies also produced losses, while momentum factors generated mixed results.
  • Credit: Returns to most credit strategies were positive, but modest. Short-term investment grade bonds outperformed US Treasuries by 0.39% while US high yield added an additional 0.26%.
  • Equity: Small caps indexes materially underperformed large cap indexes in the US, losing 1.44% on a relative basis. Value factors struggled worldwide, losing 0.87% in the US, 1.46% in developed foreign economies, and 1.10% in emerging markets.
  • Fixed Income: Term structure strategies gained 1.25% in Europe and 0.37% in the US. Inflation-linked securities underperformed nominal bonds, losing 0.56% on a relative basis at 10-year maturities.
  • Foreign Exchange: Our currency value factor rose 1.21%. Carry produced a respectable 0.30% gain, but momentum fell 0.51%.
  • Multi-Asset: Our multi-asset class momentum and trend following factors all declined, but the largest loss was only 0.59%.
  • Real Estate: Real estate securities materially outperformed small cap equities worldwide, adding 1.47% in the US and 1.88% overseas.
  • Risk: Most of our short volatility and variance factors fell, but the losses were mostly small. Our VIX term structure strategy posted the largest decline, at 1.11%.
  • Momentum: Performance among momentum and trend following strategies varied by asset class, but was generally modest.

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March 2017 Projection Review

  • Most of the indexes underlying our composite indexes have reported March returns, but our analysis is still preliminary and subject to change
  • We now estimate that hedge funds returned 0.25% in March, 0.18% less than our initial projection of 0.43%
  • As of this moment, we correctly predicted the direction of 25 of 30 strategies
  • We were within 25 basis points for 14 indexes and within 50 basis points for 20
  • Our hit rate was about average but our accuracy was above average
  • 13 strategies performed better than we anticipated; 17 performed worse
  • Most accurate: Equity Market Neutral (within 2 basis points), Merger Arbitrage (within 3 bps), and Global Macro (within 4 bps)
  • Least accurate: Energy (1.89% better than expected), Equity Short-Bias (1.26% better), and Healthcare (1.09% better)
  • Overall, our projections were 43% more accurate than naive forecasts

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