EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: April 17, 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 0.24% last week as declining US equities stifled returns
  • Hedge funds are now down 0.23% for the month and up 2.04% for the year
  • Only five of the 30 hedge fund strategies we track earned positive returns
  • Equities struggled, while bonds, real estate, and commodities all rose
  • Equities fell globally, but the largest losses came in the US where they gave back 1.12%
  • All of our global bond benchmarks rose, led by a 1.42% gain by US 10-year Treasuries
  • Oil prices rose for the third straight week as our broad commodity index added 0.73%
  • Both developed and emerging market currencies appreciated against the dollar, reversing recent losses
  • Most of our short volatility and variance factors fell, with our VIX-based strategies suffering the largest declines
  • Trend following and momentum strategies stumbled both within and across asset classes
  • We now estimate that hedge funds returned 0.32% in March, 0.11% less than our initial projection of 0.43%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.24% last week as declining US equities stifled returns
  • Hedge funds are now down 0.23% for the month and up 2.04% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and US equities (0.18%), alpha (0.10%) and currency momentum (0.04%)
  • It indicates negative weekly contributions from equity beta (-0.27%), equity sector beta (-0.07%) and the spread between MLPs and REITs (-0.05%)
  • It estimates weekly, month-to-date, and year-to-date alphas of 0.10%, 0.19%, and 0.14%, respectively

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Strategy Performance

  • Only five of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Equity Short-Bias (0.51%), Commodities (0.13%), and Merger Arbitrage (0.06%)
  • Laggards: Emerging Europe (-1.02%), Equity Long Only (-0.77%), and Energy (-0.68%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Special Situations (0.39%), Distressed Securities (0.36%), and Emerging Europe (0.30%)
  • Alpha laggards: Managed Futures (-0.61%), Equity Short-Bias (-0.21%), and Global Macro (-0.15%)

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Global Benchmarks

  • Equities struggled, while bonds, real estate, and commodities all rose
  • Leaders: gold futures (2.50%), precious metals (2.41%), and oil futures (1.84%)
  • Laggards: US materials equity (-2.59%), base metals (-2.54%), and US financials equity (-2.06%)
  • Equities: Equities fell globally, but the largest losses came in the US where they gave back 1.12%, collectively. Foreign indexes declined only modestly. Almost every US sector finished down, with cyclical sectors suffering the most.
  • Bonds: All of our global bond benchmarks rose, led by a 1.42% gain by US 10-year Treasuries. Investment grade bonds matched government bonds in the US, while high yield underperformed, held back by equity losses.
  • Real Estate: Real estate securities rallied even as stocks fell, gaining 1.01% in the US and 1.24% abroad.
  • Commodities: Oil prices rose for the third straight week, but precious metals posted the largest gain among commodity sectors. Our broad commodity index added 0.73% despite a 2.54% decline in base metals.
  • Currencies: Both developed and emerging market currencies appreciated against the dollar, reversing recent losses.
  • Multi-Asset: Our 60/40 indexes fell, but our risk parity strategies rose as strong risk-adjusted bond performance lifted returns. US indexes were more volatile than global indexes due to comparatively large stock and bond returns in domestic markets.

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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 5-year and 1-year investment grade bonds (2.15%), US Treasury bond term structure (2.13%), and the spread between 5-year and 1-year US Treasuries (1.96%)
  • Laggards: VIX futures term structure (-2.21%), 1-year US sector momentum (-1.85%), and short short-dated VIX futures (-1.79%)
  • Commodity: Trend following strategies managed to break even but momentum and term structure strategies struggled. The 1.10% loss by our term structure factor marks its third straight weekly loss.
  • Credit: Credit factors posted losses, as equity declines negatively affected performance. Investment grade bonds underperformed US Treasuries on a duration-matched basis and high yield materially underperformed investment grade.
  • Equity: Value factors fell worldwide, while size factors declined in the US and in emerging markets. Momentum factors also underwhelmed, losing 1.39% in the US.
  • Fixed Income: Term structure strategies performed very well in the US, but suffered modest losses in Europe. Inflation-linked bonds and bonds with embedded credit risk all underperformed US Treasuries.
  • Foreign Exchange: Our currency momentum factor rose by 1.21%. Carry and value strategies also produced healthy gains.
  • Multi-Asset: Trend following outperformed momentum, but all of our multi-asset class momentum and trend following factors declined.
  • Real Estate: Real estate securities materially outperformed small cap equities worldwide, adding 1.50% in the US and 1.55% overseas.
  • Risk: Most of our short volatility and variance factors fell, with our VIX-based strategies suffering the largest declines.
  • Momentum: Trend following and momentum strategies stumbled both within and across asset classes.

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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 0.32% in March, 0.11% 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 19 indexes and within 50 basis points for 21
  • Our hit rate was about average but our accuracy was above average
  • 10 strategies performed better than we anticipated; 19 performed worse
  • Most accurate: Global Macro (exact), Equity Long/Short (within 1 basis point), and Merger Arbitrage (within 2 bps)
  • Least accurate: Energy (1.67% better than expected), Equity Short-Bias (1.34% better), and Distressed Securities (1.14% worse)
  • Overall, our projections were 50% more accurate than naive forecasts

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