EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: May 22, 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 fell 0.15% last week as gains from European equities failed to offset widespread losses elsewhere
  • Hedge funds are now up 0.26% for the month and 3.18% for the year
  • 13 of the 30 hedge fund strategies we track earned positive returns
  • Equities underperformed, but fixed income, real estate, and commodity strength helped lift balanced portfolios to healthy returns
  • Equities struggled in many regions, but were up modestly globally, due primarily to a 1.59% gain in Europe
  • Fixed income indexes were among the week’s best performing benchmarks on a risk-adjusted basis
  • All major commodity sectors gained as our broad commodity index rose 2.25%
  • Developed market currencies appreciated significantly against the dollar
  • Most of our short volatility and variance factors fell
  • Momentum and trend following factors tended to struggle both within and across asset classes
  • We now estimate that hedge funds returned 0.58% in April, 0.08% less than our initial projection of 0.66%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.15% last week as gains from European equities failed to offset widespread losses elsewhere
  • Hedge funds are now up 0.26% for the month and 3.18% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between developed market equities and US equities (0.22%), equity region beta (0.05%), and fixed income term structure (0.04%)
  • It indicates negative weekly contributions from equity beta (-0.08%), the spread between emerging market and developed market equities (-0.07%), and developed currencies (-0.06%)
  • It estimates weekly, month-to-date, and year-to-date alphas of -0.04%, -0.01%, and 0.07%, respectively

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Strategy Performance

  • 13 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (0.38%), Equity Short-Bias (0.28%), and Emerging Europe (0.26%)
  • Laggards: Latin America (-3.15%), Managed Futures (-1.14%), and Global Macro (-0.41%)
  • North American funds trailed both Asian and European funds
  • The spread between developed market equities and US equities was the most significant factor driving strategy returns
  • Alpha leaders: Special Situations (0.30%), Merger Arbitrage (0.21%), and Event Driven (0.20%)
  • Alpha laggards: Managed Futures (-0.94%), Equity Short-Bias (-0.42%), and Global Macro (-0.35%)

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Global Benchmarks

  • Equities underperformed, but fixed income, real estate, and commodity strength helped lift balanced portfolios to healthy returns
  • Leaders: oil futures (5.21%), energy commodities (4.39%), and developed ex-US government bonds (2.40%)
  • Laggards: Latin America equity (-7.08%), US small cap equity (-0.99%), and US consumer discretionary equity (-0.87%)
  • Equities: Equities were up modestly globally, due primarily to a 1.59% gain in Europe. US equities declined 0.35%, with all of our style indexes and most of our sector indexes finishing in the red. Latin American stocks plummeted 7.08% as a political scandal emerged in Brazil. The Brazilian Bovespa fell 8.8% on Thursday, its largest single day loss since the 2008 financial crisis.
  • Bonds: Fixed income indexes performed well, particularly on a risk-adjusted basis where they were among the week’s best performing benchmarks. Developed market government bonds fared very well, gaining 2.40%.
  • Real Estate: Real estate securities rose worldwide, adding 1.40% in the US and 0.34% abroad.
  • Commodities: All major commodity sectors gained as our broad commodity index rose 2.25%. Energy commodities led the way with a 4.39% gain, but precious metals and base metals each added more than 2%.
  • Currencies: Developed market currencies appreciated significantly against the dollar, climbing by 1.50%. Emerging market currencies also appreciated, but to a much lesser extent.
  • Multi-Asset: Our risk parity indexes produced strong results, with our global version rising 1.80% and our US version adding 0.92%. 60/40 indexes lagged, with our US index actually losing 0.02%.

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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 developed market and US government bonds (2.74%), developed market currencies (2.44%), and the spread between global and US aggregate bonds (2.33%)
  • Laggards: the spread between Latin American and emerging market equity (-4.95%), currency carry (-3.15%), and US equity value (-2.44%)
  • Commodity: Most of our alternative commodity betas fell. Trend following lost 1.65% and term structure gave back 1.11%. Our primary momentum factors each declined by at least 1%.
  • Credit: Credit factors were mostly down when adjusted for duration. Investment grade underperformed at longer maturities and high yield underperformed everywhere.
  • Equity: Size and value factors stumbled worldwide. Country trend following and short-term momentum factors fared well, but sector momentum strategies struggled in developed markets. Latin American equities severely underperformed.
  • Fixed Income: Term structure strategies rose by more than 1% in both the US and in Europe. Inflation-linked bonds and bonds with embedded credit risk trailed US Treasuries.
  • Foreign Exchange: All of our alternative currency factors fell by at least 0.82%. Currency carry lost a whopping 3.15%.
  • Multi-Asset: Each of our multi-asset class momentum and trend following factors declined, with momentum factors suffering the largest losses.
  • Real Estate: REITs materially outperformed small caps in the US, but real estate securities did not fare as well overseas.
  • Risk: Most of our short volatility and variance factors fell, with our VIX futures term structure strategy notching the largest loss at 2.02%.
  • Momentum: Although not universally down, momentum and trend following factors tended to struggle both within 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 0.58% in April, 0.08% less than our initial projection of 0.66%
  • As of this moment, we correctly predicted the direction of 27 of 30 strategies
  • We were within 25 basis points for 19 indexes and within 50 basis points for 25
  • Our hit rate was about average but our accuracy was above average
  • 13 strategies performed better than we anticipated; 17 performed worse
  • Most accurate: Emerging Markets (within 1 basis point), Convertible Arbitrage (within 1 bp), and Technology (within 3 bps)
  • Least accurate: Energy (2.36% worse than expected), Healthcare (0.99% worse), and Emerging Europe (0.71% worse)
  • Overall, our projections were 67% more accurate than naive forecasts

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