EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: May 1, 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 0.72% last week as rising US equities once again propelled performance
  • Hedge funds are now up 0.67% for the month and 2.99% for the year
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Equities surged, leading diversified portfolios to strong gains despite mixed performance in non-equity asset classes
  • Equities posted strong gains worldwide, climbing by 1.48% in the US and by 2.70% in foreign developed markets
  • Fixed income performance was tepid compared to equities, as foreign bonds inched higher and US bonds fell
  • Our broad commodity index added 0.10% even though gold and oil futures both fell
  • Both developed and emerging market currencies appreciated against the dollar
  • Almost all of our short volatility and variance factors rose
  • Trend following factors performed strongly, but momentum factors varied substantially by asset class
  • We now estimate that hedge funds returned 0.35% in March, 0.08% less than our initial projection of 0.43%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.72% last week as rising US equities once again propelled performance
  • Hedge funds are now up 0.67% for the month and 2.99% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.34%), the spread between developed market equities and US equities (0.20%), and multi-asset class momentum (0.06%)
  • It indicates negative weekly contributions from alpha (-0.08%), the spread between emerging market and developed market equities (-0.05%), and currency momentum (-0.05%)
  • It estimates weekly, month-to-date, and year-to-date alphas of -0.08%, 0.16%, and 0.11%, respectively

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (2.38%), Europe (1.67%), and Healthcare (1.55%)
  • Laggards: Equity Short-Bias (-1.08%), Latin America (-0.23%), and Fixed Income Arbitrage (0.25%)
  • North American funds outperformed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Managed Futures (0.16%), Emerging Europe (0.14%), and Healthcare (0.13%)
  • Alpha laggards: Event Driven (-0.32%), Emerging Asia (-0.24%), and Equity Long Only (-0.20%)

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Global Benchmarks

  • Equities surged, leading diversified portfolios to strong gains despite mixed performance in non-equity asset classes
  • Leaders: developed Europe equity (4.50%), developed ex-US equity (2.70%), and US information technology equity (2.63%)
  • Laggards: US REITs (-2.80%), precious metals (-1.93%), and gold futures (-1.60%)
  • Equities: Equities posted strong gains worldwide, climbing by 1.48% in the US and by 2.70% in foreign developed markets. Developed European equities soared, rising 4.50%. Almost every sector profited in the US, led by information technology and healthcare. Our telecommunications and utilities indexes were the only equity benchmarks to suffer losses.
  • Bonds: Foreign bonds rose, but US government and investment grade securities declined. High yield bonds benefited from the equity rally, however, gaining 0.58% in the US and 0.61% overseas.
  • Real Estate: Real estate securities lagged far behind equities, losing 2.80% in the US and gaining only 0.21% abroad.
  • Commodities: Our broad commodity index added 0.10% even though gold futures lost 1.60% and oil futures fell 0.57%. Base metals gained 1.18%, helping to offset the declines.
  • Currencies: Both developed and emerging market currencies appreciated against the dollar, rising 0.37% and 0.05%, respectively
  • Multi-Asset: All of our multi-asset class benchmarks rose, but global portfolios materially outperformed US-centric portfolios. Risk parity led 60/40 globally, but underperformed 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: 1-month developed market equity country momentum (4.94%), the spread between developed European and developed market equity (4.07%), and developed market equity country trend following (3.06%)
  • Laggards: the spread between US REITs and equities (-2.93%), currency carry (-2.66%), and the spread between emerging and developed market equity indexes (-2.59%)
  • Commodity: Our trend following index rose 1.15%, but our term structure and medium-term momentum indexes all fell.
  • Credit: Credit factors gained in the US as corporate securities outperformed government bonds. Our US long high yield, short investment grade spread factor added 1.12%.
  • Equity: Size and value factors struggled worldwide. Our US single stock momentum factor gained 1.17%, but our medium-term developed market country momentum index fell 2.57%.
  • Fixed Income: Term structure strategies underperformed in the US, but rose in Europe. US inflation-linked securities materially outperformed Treasuries, gaining 1.88% on a relative basis at the 10-year maturity.
  • Foreign Exchange: All of our alternative currency factors stumbled. Currency carry plummeted 2.66% while our momentum and value indexes each lost around 1.50%.
  • Multi-Asset: Each of our multi-asset class momentum and trend following factors rallied, gaining between 1.42% and 2.18%.
  • Real Estate: Real estate securities severely underperformed small cap equities globally, lagging by 2.54% in the US and 2.31% overseas.
  • Risk: Almost all of our short volatility and variance factors rose, led by our short VIX futures strategy, which added 2.11%.
  • Momentum: Trend following factors gained almost universally, but momentum factor performance varied materially by asset class.

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March 2017 Projection Review

  • All 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 0.35% in March, 0.08% 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 17 indexes and within 50 basis points for 24
  • Our hit rate was about average but our accuracy was above average
  • 14 strategies performed better than we anticipated; 15 performed worse
  • Most accurate: Asia (exact), Merger Arbitrage (within 1 basis point), and Fund of Funds (within 2 bps)
  • Least accurate: Latin America (1.64% worse than expected), Distressed Securities (1.41% worse), and Energy (0.80% better)
  • Overall, our projections were 67% more accurate than naive forecasts

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