EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: May 15, 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 0.25% last week as foreign equity gains lifted returns
  • Hedge funds are now up 0.43% for the month and 3.41% for the year
  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Energy commodities and emerging market equities surged, but most asset classes globally posted mixed results
  • Equities dropped 0.38% in the US but gained 2.18% in emerging markets
  • Foreign developed market government bonds struggled, but all of our other fixed income benchmarks rose
  • Our broad commodity index gained 1.40% as oil futures added 3.38%
  • Developed market currencies depreciated against the dollar while emerging market currencies appreciated
  • All of our short volatility and variance factors rose
  • Trend following and momentum factors posted inconsistent performance across asset classes
  • We now estimate that hedge funds returned 0.63% in April, 0.03% less than our initial projection of 0.66%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.25% last week as foreign equity gains lifted returns
  • Hedge funds are now up 0.43% for the month and 3.41% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and US equities (0.13%), the spread between emerging market and developed market equities (0.08%), and alpha (0.07%)
  • It indicates negative weekly contributions from equity beta (-0.10%), equity region beta (-0.02%), and lagged credit (-0.02%)
  • It estimates weekly, month-to-date, and year-to-date alphas of 0.07%, 0.06%, and 0.18%, respectively

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Strategy Performance

  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (1.58%), Emerging Asia (1.16%), and Emerging Markets (0.95%)
  • Laggards: Healthcare (-0.66%), Managed Futures (0.01%), and Equity Short-Bias (0.02%)
  • North American funds trailed both Asian and European funds
  • The spread between emerging market and developed market equities was the most significant factor driving strategy returns
  • Alpha leaders: Commodities (0.18%), Equity Value (0.16%), and Global Macro (0.15%)
  • Alpha laggards: Asia (-0.12%), Healthcare (-0.09%), and Special Situations (-0.05%)

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Global Benchmarks

  • Energy commodities and emerging market equities surged, but most asset classes globally posted mixed results
  • Leaders: Latin America equity (3.75%), energy commodities (3.55%), and oil futures (3.38%)
  • Laggards: US materials equity (-1.40%), US REITs (-1.38%), and US financials equity (-1.33%)
  • Equities: Equities stumbled in the US, dropping by 0.38%. Small caps and value stocks underperformed and most sectors finished in the red. Equities fared much better in foreign markets, gaining 0.37% in developed economies and 2.18% in emerging markets. Latin American stocks had a particularly strong week, rising by 3.75%.
  • Bonds: Foreign developed market government bonds struggled, but all of our other fixed income benchmarks rose. Markets rewarded credit risk as corporate and emerging market bonds gained worldwide.
  • Real Estate: Real estate securities stumbled in the US, losing 1.38%. They gained 0.76% outside the US but finished in the red globally.
  • Commodities: Gains from oil and other energy futures pushed our broad commodity index to a 1.40% gain. All of the other sectors posted modest gains or losses.
  • Currencies: Developed market currencies depreciated against the dollar while emerging market currencies appreciated. Both moves were muted, however.
  • Multi-Asset: Our multi-asset class benchmarks posted mixed results, but none earned or lost more than 0.16%.

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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: VIX futures term structure (2.39%), the spread between emerging and developed market equity indexes (2.23%), and the spread between US information technology equity and the market (2.05%)
  • Laggards: emerging market equity size (-2.55%), US equity index value (-1.59%), and emerging market equity value (-1.51%)
  • Commodity: All or our alternative commodity betas fell. Trend following lost 0.96% and term structure gave back 1.10%. Most of our short and medium-term momentum factors declined by around 1%.
  • Credit: Credit factors rose worldwide, with the largest returns coming from short-term US investment grade spreads.
  • Equity: Size and value factors struggled worldwide. US single stock momentum gained 0.59%, but most of our country momentum and trend following factors declined.
  • Fixed Income: Term structure strategies rose in the US but fell by more than 1% in Europe. Inflation-linked securities underperformed nominal bonds in the US but outperformed internationally.
  • Foreign Exchange: All of our alternative currency factors rose, led by currency carry, which added 1.48%.
  • Multi-Asset: Each of our multi-asset class momentum and trend following factors gained between 0.22% and 0.50%.
  • Real Estate: Real estate securities modestly underperformed small cap equities in the US but outperformed abroad.
  • Risk: All of our short volatility and variance factors rose, paced by a 2.39% gain in our VIX futures term structure strategy.
  • Momentum: Trend following and momentum factors posted mixed performance, falling in commodity and equity markets but rising in currency markets and across 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 0.63% in April, 0.03% 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 20 indexes and within 50 basis points for 25
  • Both our hit rate and our accuracy were above average
  • 13 strategies performed better than we anticipated; 16 performed worse
  • Most accurate: Equity Market Neutral (exact), North America (within 1 basis point), and Convertible Arbitrage (within 1 bp)
  • Least accurate: Energy (2.60% worse than expected), Healthcare (1.03% worse), and Latin America (0.90% better)
  • Overall, our projections were 67% more accurate than naive forecasts

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