EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: April 24, 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 0.15% last week as rising US equities lifted returns
  • Hedge funds are now down 0.09% for the month and up 2.25% for the year
  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Commodities stumbled as oil futures dropped more than 7%, but US equity gains helped balanced portfolios sidestep losses
  • Most US equity sectors performed well, with industrials and consumer discretionary each earning more than 2%
  • Most of our fixed income benchmarks notched small profits, but our aggregate US bond index was flat
  • Every major commodity sector declined as commodities, as a whole, lost 3.70%
  • Both developed and emerging market currencies appreciated slightly against the dollar
  • Most of our short volatility and variance factors rose, led by our short global equity variance factor
  • Trend following and momentum strategy performance varied significantly by asset class
  • We now estimate that hedge funds returned 0.38% in March, 0.05% less than our initial projection of 0.43%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.15% last week as rising US equities lifted returns
  • Hedge funds are now down 0.09% for the month and up 2.25% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.24%), equity size (0.05%) and the spread between listed real estate and equities (0.02%)
  • It indicates negative weekly contributions from the spread between developed market equities and US equities (-0.13%), lagged credit (-0.04%) and oil beta (-0.03%)
  • It estimates weekly, month-to-date, and year-to-date alphas of 0.01%, 0.19%, and 0.19%, respectively

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Strategy Performance

  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Technology (0.74%), Emerging Europe (0.60%), and Equity Long Only (0.56%)
  • Laggards: Equity Short-Bias (-1.00%), Energy (-0.60%), and Managed Futures (-0.45%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Special Situations (0.17%), Merger Arbitrage (0.13%), and Event Driven (0.12%)
  • Alpha laggards: Managed Futures (-0.76%), Global Macro (-0.24%), and Commodities (-0.20%)

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Global Benchmarks

  • Commodities stumbled as oil futures dropped more than 7%, but US equity gains helped balanced portfolios sidestep losses
  • Leaders: US small cap equity (2.47%), US industrials equity (2.37%), and US consumer discretionary equity (2.04%)
  • Laggards: oil futures (-7.41%), energy commodities (-6.56%), and commodities (-3.70%)
  • Equities: Most sectors in the US performed well, with industrials and consumer discretionary each earning more than 2%. US equities, in aggregate, gained 1.06%, led by small caps and growth stocks. Foreign equities posted only modest gains.
  • Bonds: Most of our fixed income benchmarks notched small profits. Our aggregate US bond and investment grade indexes were both flat, while inflation-linked securities fell 0.54%. Foreign bonds rose modestly.
  • Real Estate: Real estate securities gained 0.89% in the US but gave up 0.25% abroad.
  • Commodities: Commodities struggled, losing 3.70% as oil futures plummeted 7.41%. Every major commodity sector declined, although gold did manage to avoid losses, earning 0.06%. Energy commodities, in aggregate, fell 6.56%.
  • Currencies: Both developed and emerging market currencies appreciated slightly against the dollar, rising between 0.13% and 0.17%.
  • Multi-Asset: All of our multi-asset class benchmarks rose, gaining between 0.47% and 0.76%. US-centric portfolios outperformed global portfolios and risk parity strategies outperformed 60/40 strategies.

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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 industrials equity and the market (2.25%), US equity index size (2.08%), and commodity trend following (1.75%)
  • Laggards: emerging market equity value (-3.12%), the spread between US energy equity and the market (-2.39%), and commodity beta (-2.38%)
  • Commodity: Our trend following index rose 1.75%. Term structure and momentum strategies also produced healthy gains, with short-term momentum factors outperforming medium-term factors.
  • Credit: Credit factors were modestly positive, but did not contribute significantly to global asset performance.
  • Equity: Size factors gained worldwide, while value factors produced mixed results across regions. Medium-term country momentum strategies mostly posted losses, but US single stock and sector momentum factors rose.
  • Fixed Income: Term structure strategies were mostly flat worldwide. US inflation-linked securities materially underperformed nominal bonds.
  • Foreign Exchange: Our currency momentum factor fell by 0.84%. Carry and value strategies did not move significantly.
  • Multi-Asset: Trend following and short-term momentum factors rose 0.58% and 1.09%, respectively. Medium-term momentum was nearly unchanged, however.
  • Real Estate: Real estate securities materially underperformed small cap equities worldwide, trailing by 0.92% in the US and 1.25% in foreign developed markets.
  • Risk: Most of our short volatility and variance factors rose, led by our short global equity variance factor’s 1.03% gain.
  • Momentum: Trend following and momentum strategy performance varied significantly by asset class, producing strong returns in commodities and tepid returns elsewhere.

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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 0.38% in March, 0.05% less than our initial projection of 0.43%
  • As of this moment, we correctly predicted the direction of 26 of 30 strategies
  • We were within 25 basis points for 19 indexes and within 50 basis points for 24
  • Our hit rate was about average but our accuracy was above average
  • 16 strategies performed better than we anticipated; 14 performed worse
  • Most accurate: Europe (within 1 basis point), Fund of Funds (within 1 bp), and Managed Futures (within 3 bps)
  • Least accurate: Distressed Securities (1.20% worse than expected), Equity Short-Bias (1.09% better), and Energy (0.97% better)
  • Overall, our projections were 72% more accurate than naive forecasts

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