EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: May 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 0.57% in May as global equity gains fueled profits
  • Hedge funds are now up 3.48% for the year
  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Balanced portfolios once again fared well amid global equity and fixed income strength
  • Foreign equities produced strong gains, aided by US dollar depreciation
  • Every one of our nominal bond indexes rose, but gains were largest overseas
  • Commodities fell for the third straight month, losing 1.65% as most sectors declined
  • Developed and emerging market currencies both surged against the dollar
  • All of our short volatility and variance factors earned positive returns
  • Trend following strategies rose within and across most asset classes
  • 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 0.57% in May as global equity gains fueled profits
  • Hedge funds are now up 3.48% for the year
  • Our factor attribution analysis suggests positive monthly contributions from the spread between developed market equities and US equities (0.41%), equity beta (0.24%), and fixed income term structure (0.07%)
  • It indicates negative monthly contributions from equity size (-0.12%), developed currencies (-0.07%), and equity sector beta (-0.07%)
  • It estimates month-to-date and year-to-date alphas of 0.05% and 0.08%, respectively

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Strategy Performance

  • All but five of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Asia (1.44%), Emerging Markets (1.12%), and Europe (0.95%)
  • Laggards: Energy (-1.79%), Latin America (-0.76%), and Equity Short-Bias (-0.47%)
  • 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 (0.48%), Emerging Europe (0.43%), and Equity Value (0.24%)
  • Alpha laggards: Managed Futures (-0.63%), Equity Growth (-0.52%), and Equity Long Only (-0.47%)

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Global Benchmarks

  • Balanced portfolios once again fared well amid global equity and fixed income strength. Among the major asset classes, only commodities struggled.
  • Leaders: developed Europe equity (4.97%), US information technology equity (4.32%), and US utilities equity (3.95%)
  • Laggards: US MLPs (-4.84%), US energy equity (-3.76%), and oil futures (-2.77%)
  • Equities: Foreign equities produced strong gains, aided by US dollar depreciation. European developed market stocks rose by 4.97% while Asian emerging market equities added 3.61%. US equities climbed 1.05% but performance varied significantly by sector. Energy stocks fell by 3.76% while technology and utility equities rose by 4.32% and 3.95%, respectively. Growth stocks and large caps profited, but value stocks and small caps stumbled.
  • Bonds: Every one of our nominal bond indexes rose. Gains were largest overseas as currency moves favored foreign securities. US Treasuries added 0.58%, with the largest gains coming from longer maturities, both on an absolute and risk-adjusted basis. Investment grade bonds outperformed government bonds globally.
  • Real Estate: Real estate surged abroad, but struggled domestically. Our global ex-US index finished up 3.24% while our US REIT index declined by 0.55%.
  • Commodities: Commodities fell for the third straight month, losing 1.65% as most sectors declined. Energy dropped 2.66% and agricultural commodities dipped 1.95%.
  • Currencies: Developed and emerging market currencies both surged against the dollar, gaining 1.93% and 1.07%, respectively.
  • 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. Global strategies outgained US-centric strategies, due mostly to foreign currency strength.

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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 emerging market equity sector momentum (5.16%), 1-month developed market equity country momentum (4.46%), and the spread between US information technology equity and the market (4.39%)
  • Laggards: US equity size (-5.59%), US equity index value (-4.46%), and developed market equity value (-4.44%)
  • Commodity: Alternative commodity betas produced mixed results. Trend following gained while term structure declined. Momentum strategies surged at the sector level, but stumbled at the individual security level.
  • Credit: US investment grade credit strategies gained at all maturities. Foreign credit factors fell in both developed and emerging markets, however.
  • Equity: Size and value strategies plummeted worldwide and were among the week’s worst performing factors. Momentum and trend following strategies tended to rise, however. Returns to 1-month momentum factors were particularly strong.
  • Fixed Income: Long 10-year, short 1-year government term structure strategies gained 1.31% in the US and 2.11% in Europe. Most of our other fixed income strategies produced healthy returns. US inflation-linked securities were the notable exception. Our 10-year US Treasury spread factor fell 2.40%.
  • Foreign Exchange: Currency carry once again posted a large loss, this time of 2.76%. Returns to momentum and value strategies were modest, by comparison.
  • Multi-Asset: Each of our multi-asset class factors rose, with trend following and short-term momentum each gaining at least 1.81%.
  • Real Estate: Real estate securities outperformed small cap equities worldwide, but foreign assets did so only modestly.
  • Risk: All of our short volatility and variance factors earned positive returns, led by our US buy-write strategy’s 1.86% gain.
  • Momentum: Trend following strategies rose within and across most asset classes. Momentum strategies were mixed, but more strategies gained than lost.

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April 2017 Projection Review

  • All of the indexes underlying our composite indexes have reported April returns
  • Hedge funds returned 0.56% in April, 0.10% less than our initial projection of 0.66%
  • 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 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 2 basis points), Emerging Asia (within 3 bps), and Equity Market Neutral (within 3 bps)
  • Least accurate: Energy (2.18% worse than expected), Emerging Europe (1.49% worse), and Healthcare (1.42% worse)
  • Overall, our projections were 55% more accurate than naive forecasts

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