EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: May 8, 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 0.22% last week as rising US equities once again lifted returns
  • Hedge funds are now up 0.22% for the month and 3.20% for the year
  • All but six of the 30 hedge fund strategies we track earned positive returns
  • Developed market equity gains helped offset declines in fixed income and commodities
  • Equities added 0.55% in the US and 1.57% in developed foreign markets
  • Bonds struggled in the US as Treasuries finished down and inflation-linked securities dropped 1.01%
  • Our broad commodity index lost 2.36% as oil futures plummeted 6.29%
  • Both developed and emerging market currencies appreciated slightly against the dollar
  • Almost all of our short volatility and variance factors rose, but the gains were very modest
  • Trend following factors gained almost universally, but momentum factors varied
  • We now estimate that hedge funds returned 0.64% in April, 0.02% less than our initial projection of 0.66%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.22% last week as rising US equities once again lifted returns
  • Hedge funds are now up 0.22% for the month and 3.20% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and US equities (0.17%), equity beta (0.13%), and multi-asset class momentum (0.06%)
  • It indicates negative weekly contributions from the spread between emerging market and developed market equities (-0.08%), equity size (-0.05%), and the spread between MLPs and REITs (-0.03%)
  • It estimates weekly, month-to-date, and year-to-date alphas of 0.02%, 0.02%, and 0.15%, respectively

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Strategy Performance

  • All but six of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Europe (0.62%), Equity Value (0.36%), and Equity Long/Short (0.33%)
  • Laggards: Energy (-0.63%), Equity Short-Bias (-0.38%), and Emerging Europe (-0.35%)
  • North American funds outperformed Asian funds and trailed European funds
  • The spread between developed market equities and US equities was the most significant factor driving strategy returns
  • Alpha leaders: Special Situations (0.31%), Emerging Europe (0.27%), and Distressed Securities (0.09%)
  • Alpha laggards: Europe (-0.21%), Emerging Asia (-0.15%), and Equity Growth (-0.15%)

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Global Benchmarks

  • Developed market equity gains helped offset declines in fixed income and commodities
  • Leaders: developed Europe equity (2.95%), developed ex-US equity (1.57%), and US information technology equity (1.55%)
  • Laggards: oil futures (-6.29%), energy commodities (-5.05%), and precious metals (-3.62%)
  • Equities: Equities rose in developed markets, both domestic and abroad, adding 0.55% in the US and 1.57% overseas. Most of the foreign gains came in Europe, which climbed 2.95%. In the US, large caps outperformed small caps and growth stocks outperformed value stocks. Most sectors rose, with telecommunications and energy the notable exceptions.
  • Bonds: Bonds struggled in the US. US Treasuries finished down at most maturities and inflation-linked securities dropped 1.01%. Corporate bonds fared better, but still declined. Foreign bonds rose in developed markets, but fell in emerging markets.
  • Real Estate: Real estate securities stumbled in the US, but gained internationally, finishing flat globally.
  • Commodities: Our broad commodity index lost 2.36% as oil futures plummeted 6.29% and most commodity sectors dropped. Agricultural commodities managed to eke out a 0.63% gain, however.
  • Currencies: Both developed and emerging market currencies appreciated slightly against the dollar.
  • Multi-Asset: Most our of multi-asset class benchmarks rose, with 60/40 strategies outperforming risk parity strategies on a risk-adjusted basis. Global portfolios fared better than US-centric portfolios.

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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 (3.52%), the spread between developed European and developed market equity (3.07%), and developed market equity country trend following (2.02%)
  • Laggards: the spread between developed Asian-Pacific and developed market equity (-2.34%), the spread between emerging and developed market equity indexes (-2.17%), and the spread between US inflation-linked bonds and US Treasuries (-2.17%)
  • Commodity: Our trend following index rose 0.89%, but our term structure and medium-term momentum indexes all fell. Short-term momentum factors, on the other hand, gained nearly 2%.
  • Credit: Credit factors rose worldwide, with the largest returns coming from US investment grade spreads.
  • Equity: Size and value factors struggled worldwide. Short-term momentum factors performed strongly, but medium-term momentum factors declined. Our developed country trend following factor added 2.02%.
  • Fixed Income: Term structure strategies fell in the US, but rose in Europe. US inflation-linked securities materially underperformed Treasuries, losing 1.67% on a relative basis at the 10-year maturity.
  • Foreign Exchange: All of our alternative currency factors declined. Carry and momentum each lost nearly 1%, while value gave back 0.28%.
  • Multi-Asset: Each of our multi-asset class momentum and trend following factors rose, but momentum factors materially outperformed trend following.
  • Real Estate: Real estate securities lagged small cap equities globally, trailing by 0.09% in the US and 0.18% overseas.
  • Risk: Almost all of our short volatility and variance factors rose, but the gains were very modest.
  • Momentum: Trend following factors gained almost universally, but momentum factor performance varied. Short-term momentum factors outperformed medium-term factors in most asset classes.

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April 2017 Projection Review

  • Most of the indexes underlying our composite indexes have reported April returns, but our analysis is still preliminary and subject to change
  • We now estimate that hedge funds returned 0.64% in April, 0.02% less than our initial projection of 0.66%
  • As of this moment, we correctly predicted the direction of 28 of 30 strategies
  • We were within 25 basis points for 19 indexes and within 50 basis points for 27
  • Both our hit rate and our accuracy were above average
  • 13 strategies performed better than we anticipated; 14 performed worse
  • Most accurate: Distressed Securities (exact), Convertible Arbitrage (exact), and Multi-Strategy (exact)
  • Least accurate: Energy (2.46% worse than expected), Latin America (0.91% better), and Commodities (0.53% worse)
  • Overall, our projections were 75% more accurate than naive forecasts

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