EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: April 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 0.66% in April as long equity factors lifted returns
  • Hedge funds are now up 2.99% for the year
  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Balanced portfolios fared well as both equities and bonds rallied worldwide, helping to overcome commodity losses
  • Equities gained 1.65% globally, with foreign stocks outperforming US equities
  • Every one of our bond benchmarks rose, with foreign bonds leading US bonds
  • Gold rose 1.43%, but this was not enough to keep our broad commodity index from finishing down 1.84%.
  • Developed currencies appreciated 0.49% against the dollar, while emerging currencies were essentially flat
  • Almost all of our short volatility and variance factors earned positive returns
  • Trend following strategies gained within and across most asset classes, but medium-term momentum strategies tended to struggle
  • Hedge funds returned 0.37% in March, 0.06% less than our initial projection of 0.43%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.66% in April as long equity factors lifted returns
  • Hedge funds are now up 2.99% for the year
  • Our factor attribution analysis suggests positive monthly contributions from equity beta (0.23%), the spread between developed market equities and US equities (0.22%), and alpha (0.18%)
  • It indicates negative monthly contributions from lagged credit (-0.08%), commodity momentum (-0.07%), and currency momentum (-0.05%)
  • It estimates month-to-date and year-to-date alphas of 0.18% and 0.14%, respectively

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Strategy Performance

  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Europe (2.38%), Europe (1.63%), and Healthcare (1.44%)
  • Laggards: Equity Short-Bias (-1.02%), Energy (-0.55%), and Managed Futures (-0.36%)
  • North American funds outperformed Asian funds and trailed European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Emerging Europe (0.65%), Special Situations (0.63%), and Emerging Asia (0.50%)
  • Alpha laggards: Managed Futures (-0.85%), Equity Short-Bias (-0.36%), and Global Macro (-0.18%)

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Global Benchmarks

  • Balanced portfolios fared well as both equities and bonds rallied worldwide. Among the major asset classes, only commodities struggled.
  • Leaders: developed Europe equity (4.06%), emerging EMEA equity (4.00%), and global risk parity (2.58%)
  • Laggards: energy commodities (-3.55%), US energy equity (-3.31%), and oil futures (-3.19%)
  • Equities: Equities gained 1.65% globally, with foreign stocks outperforming US equities. Almost all the gain worldwide came in the last week of the month as markets soared. Most sectors rose, with energy and telecommunications the notable laggards. Large caps moderately outperformed small caps, but growth stocks materially outperformed value stocks.
  • Bonds: Unlike equities, bonds did not rally into month’s end. However, they did notch healthy returns earlier in the month, leading to a 1.14% total return worldwide. Every one of our bond benchmarks rose, with foreign bonds outperforming US bonds.
  • Real Estate: Real estate did not keep up with equities domestically, as REITs gave back 0.02%. Foreign real estate securities, however, did manage to perform in-line with foreign stocks.
  • Commodities: Commodities fell for the second straight month, suffering due to losses in energy, base metals, and agricultural futures. Gold rose 1.43%, but this was not enough to keep our broad commodity index from finishing down 1.84%.
  • Currencies: Developed currencies appreciated 0.49% against the dollar, while emerging currencies were essentially flat, losing 0.01%.
  • Multi-Asset: All of our multi-asset class benchmarks posted healthy returns, but risk parity strategies materially outperformed 60/40, both in absolute and risk-adjusted return, as leveraged fixed income exposure generated meaningful profits.

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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 (4.13%), the spread between global and US inflation-linked securities (4.03%), and the spread between developed European and developed market equity (3.84%)
  • Laggards: emerging market equity value (-4.48%), US equity index value (-3.46%), and the spread between US energy equity and the market (-3.19%)
  • Commodity: Our commodity trend following factor earned 2.15%, but our term structure and medium-term momentum strategies struggled.
  • Credit: Short-dated investment grade bonds earned 0.94% in excess of comparable maturity Treasury bonds. Most credit factors produced muted returns, however.
  • Equity: Value stocks severely underperformed growth stocks in every major region for the second straight month. Value factors are now among the worst performers in our entire factor universe year-to-date. Country index trend following strategies gained in both developed and emerging markets. Momentum strategies were less fortunate.
  • Fixed Income: Long 10-year, short 1-year government term structure strategies gained 1.75% in the US and 1.47% in Europe. Most of our other fixed income strategies produced only modest returns.
  • Foreign Exchange: Our currency carry and momentum factors once again posted large losses, this time of 1.67% and 1.72%, respectively. As with last month, currency value fared much better, gaining 0.38%.
  • Multi-Asset: Each of our multi-asset class factors rose, with trend following and short-term momentum each gaining at least 1.26%.
  • Real Estate: Real estate securities underperformed small cap equities worldwide, due mostly to sizable losses of more than 2% during the last week of the month.
  • Risk: Aside from our VIX term structure strategy, which fell 2.89%, all of our short volatility and variance factors earned positive returns, led by our global short equity variance strategy.
  • Momentum: Trend following strategies gained within and across most asset classes, but medium-term momentum strategies tended to struggle, particularly among equities, commodities, and currencies.

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March 2017 Projection Review

  • All of the indexes underlying our composite indexes have reported March returns
  • Hedge funds returned 0.37% in March, 0.06% less than our initial projection of 0.43%
  • We correctly predicted the direction of 25 of 30 strategies
  • We were within 25 basis points for 16 indexes and within 50 basis points for 24
  • Our hit rate was about average but our accuracy was above average
  • 13 strategies performed better than we anticipated; 17 performed worse
  • Most accurate: Global Macro (within 2 basis points), Fund of Funds (within 3 bps), and Asia (within 4 bps)
  • Least accurate: Latin America (1.56% worse than expected), Distressed Securities (1.43% worse), and Energy (0.85% better)
  • Overall, our projections were 67% more accurate than naive forecasts

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