EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: May 29, 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 0.33% last week as rising equities fueled gains
  • Hedge funds are now up 0.51% for the month and 3.43% for the year
  • All but three of the 30 hedge fund strategies we track earned positive returns
  • Equity strength lifted balanced portfolios to gains, even amid fixed income and commodity weakness
  • Equities gained 1.08% globally, with the largest gains coming from the US and emerging markets
  • US Treasuries declined at most maturities, but corporate bonds rose slightly as markets rewarded credit risk
  • Most major commodity sectors declined as our broad index commodity fell 1.19%
  • Both developed and emerging market currencies appreciated against the dollar, but the gains were small
  • All of our short volatility and variance factors rose
  • Momentum and trend following factors tended to rise both within and across asset classes
  • We now estimate that hedge funds returned 0.56% in April, 0.10% less than our initial projection of 0.66%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.33% last week as rising equities fueled gains
  • Hedge funds are now up 0.51% for the month and 3.43% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.33%), the spread between emerging market and developed market equities (0.07%), and lagged credit (0.05%)
  • It indicates negative weekly contributions from the spread between developed market equities and US equities (-0.16%), equity sector beta (-0.04%), and alpha (-0.03%)
  • It estimates weekly, month-to-date, and year-to-date alphas of -0.03%, -0.09%, and -0.04%, respectively

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Strategy Performance

  • All but three of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (0.92%), Managed Futures (0.82%), and Emerging Markets (0.67%)
  • Laggards: Equity Short-Bias (-0.89%), Energy (-0.77%), and Emerging Europe (-0.06%)
  • North American funds trailed Asian funds but outperformed European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Convertible Arbitrage (0.08%), Managed Futures (0.05%), and Global Macro (0.05%)
  • Alpha laggards: Equity Long Only (-0.28%), Emerging Asia (-0.26%), and Asia (-0.19%)

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Global Benchmarks

  • Equity strength lifted balanced portfolios to gains, even amid fixed income and commodity weakness
  • Leaders: Latin America equity (2.70%), US utilities equity (2.54%), and US information technology equity (2.30%)
  • Laggards: US energy equity (-2.40%), agricultural commodities (-2.02%), and energy commodities (-1.85%)
  • Equities: Equities gained 1.08% globally, with the largest gains coming from the US and emerging markets. Developed European equities only added a modest 0.08%. Every domestic sector except energy rose, with most gaining at least 1%. All of our US style indexes notched returns greater than 1%, but large caps and growth stocks outperformed small caps and value stocks, respectively.
  • Bonds: Bonds also gained globally, but the returns were very modest. US Treasuries actually declined at most maturities. Corporate bonds rose slightly as markets rewarded credit risk. Foreign-denominated bonds benefited from dollar weakness.
  • Real Estate: Real estate securities rose worldwide, adding 0.35% in the US and 1.16% abroad.
  • Commodities: Most major commodity sectors declined as our broad index fell 1.19%. Agricultural and energy commodities struggled the most, dipping by around 2% each. Precious metals was the only sector to rise, gaining 1.47%.
  • Currencies: Both developed and emerging market currencies appreciated against the dollar, but the gains were small.
  • Multi-Asset: All of our multi-asset class benchmarks produced healthy gains, but risk parity outperformed 60/40 on both an absolute and risk-adjusted basis. US-centric portfolios slightly outgained global 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 US sector momentum (2.12%), commodity term structure (1.92%), and 1-month commodity sector momentum (1.75%)
  • Laggards: the spread between US energy equity and the market (-2.80%), US equity size (-1.71%), and the spread between emerging European and emerging market equity (-1.52%)
  • Commodity: All of our alternative commodity betas rose. Term structure, trend following, and short-term momentum factors each notched gains in excess of 1%. Medium-term momentum factors lagged behind, but also posted positive performance.
  • Credit: Credit factors earned modest positive returns globally, but US factors outperformed foreign factors.
  • Equity: Size and value factors stumbled in the US and produced mixed performance overseas. Sector momentum strategies were among the week’s best performing factors, however. Country trend following and momentum factors also gained.
  • Fixed Income: Term structure strategies declined in the US, but rose 0.73% in Europe. Inflation-linked securities underperformed nominal bonds worldwide.
  • Foreign Exchange: Currency momentum generated a 1.21% return. Carry added 0.44%, but value fell by 0.64%.
  • Multi-Asset: Each of our multi-asset class momentum and trend following factors rose, led by a 1.23% gain in our trend following strategy.
  • Real Estate: REITs lagged US small caps by 0.42%, but real estate securities outperformed equities in foreign markets.
  • Risk: All of our short volatility and variance factors rose, with our VIX futures term structure strategy notching the largest gain at 1.55%.
  • Momentum: Momentum and trend following factors tended to rise both within and across asset classes.

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April 2017 Projection Review

  • All 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 0.56% in April, 0.10% less than our initial projection of 0.66%
  • As of this moment, we correctly predicted the direction of 26 of 30 strategies
  • We were within 25 basis points for 18 indexes and within 50 basis points for 26
  • Our hit rate was about average but our accuracy was above average
  • 11 strategies performed better than we anticipated; 19 performed worse
  • Most accurate: Convertible Arbitrage (within 1 basis point), Technology (within 2 bps), and Equity Value (within 3 bps)
  • Least accurate: Energy (2.48% worse than expected), Healthcare (1.48% worse), and Emerging Europe (1.27% worse)
  • Overall, our projections were 55% more accurate than naive forecasts

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