EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: June 5, 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 0.47% last week as equity gains and positive alpha drove returns
  • Hedge funds are now up 0.45% for the month and 3.93% for the year
  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Equity and fixed income strength led diversified portfolios to gains, even as commodities continued to decline
  • Equities gained in developed markets, rising 1.09% in the US and 1.58% overseas
  • All of our fixed income benchmark indexes notched gains, led by government and investment grade bonds
  • Most major commodity sectors declined as our broad index fell 2.41%
  • Both developed and emerging market currencies appreciated against the dollar
  • Most of our short volatility and variance factors rose
  • Trend following strategies tended to gain both within and across asset classes, but momentum factors produced mixed results

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.47% last week as equity gains and positive alpha drove returns
  • Hedge funds are now up 0.45% for the month and 3.93% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.26%), alpha (0.15%), and the spread between developed market equities and US equities (0.08%)
  • It indicates negative weekly contributions from the spread between emerging market and developed market equities (-0.07%), the spread between MLPs and REITs (-0.05%), and agricultural commodity beta (-0.02%)
  • It estimates weekly, month-to-date, and year-to-date alphas of 0.15%, 0.04%, and 0.10%, respectively

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Strategy Performance

  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Managed Futures (1.06%), Healthcare (1.05%), and Asia (0.74%)
  • Laggards: Equity Short-Bias (-0.72%), Latin America (-0.55%), and Energy (-0.33%)
  • North American funds trailed both Asian and European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Emerging Europe (0.22%), Healthcare (0.20%), and Managed Futures (0.20%)
  • Alpha laggards: Convertible Arbitrage (-0.03%), Latin America (-0.02%), and Emerging Asia (0.02%)

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Global Benchmarks

  • Equity and fixed income strength led diversified portfolios to gains, even as commodities continued to decline
  • Leaders: developed Asia-Pacific equity (2.52%), US telecommunications equity (2.37%), and US risk parity (2.16%)
  • Laggards: energy commodities (-4.89%), oil futures (-4.28%), and US MLPs (-2.54%)
  • Equities: Equities gained in developed markets, rising 1.09% in the US and 1.58% overseas. Emerging market equities were less fortunate, falling 0.02%. All of our US style indexes rose, as did most of our sector indexes. Energy and MLPs were the notable laggards, declining by more than 2% each.
  • Bonds: All of our fixed income benchmark indexes notched gains. US Treasuries and investment grade bonds each rose more than 1.4% on a risk-adjusted basis. Foreign securities and high yield bonds trailed, but produced healthy returns nevertheless.
  • Real Estate: Real estate securities rose worldwide, adding 0.95% in the US and 1.99% abroad.
  • Commodities: Most major commodity sectors declined as our broad index fell 2.41%. Energy commodities stumbled, losing 4.89% as oil futures dropped 4.28%. Gold futures rose 0.71%, but this was far from enough to offset losses elsewhere.
  • Currencies: Both developed and emerging market currencies appreciated against the dollar, gaining 0.13% and 0.49%, respectively.
  • Multi-Asset: All of our multi-asset class benchmarks produced meaningful gains, but risk parity outperformed 60/40 on both an absolute and risk-adjusted basis.

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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 commodity sector momentum (3.43%), commodity trend following (2.42%), and 1-year commodity sector momentum (1.64%)
  • Laggards: the spread between US energy equity and the market (-2.48%), the spread between emerging and developed market equity (-1.73%), and 1-year emerging market equity sector momentum (-1.65%)
  • Commodity: All of our alternative commodity betas rose by at least 1.18%. Short-term sector momentum surged 3.43% and trend following added 2.42%. Term structure notched a 1.48% gain.
  • Credit: Most duration-adjusted credit factors declined. High yield underperformed investment grade globally.
  • Equity: Size factors rose worldwide, but value factors fell, losing as much as 1.44%. Momentum and trend following factors were mostly up. Most sectors in the US outperformed the broader market, but energy, financials, and MLPs materially underperformed.
  • Fixed Income: Term structure strategies gained 0.16% in Europe, but rose more than 1% in the US. Inflation-linked securities and bonds with embedded credit risk failed to match nominal and risk-free bonds, respectively.
  • Foreign Exchange: Currency momentum and value each added about 0.50% even as carry gave back 0.20%.
  • Multi-Asset: Each of our multi-asset class momentum and trend following factors rose, led by a 1.09% gain in our trend following strategy.
  • Real Estate: US REITs lagged domestic small caps by 0.43%, but real estate securities outperformed equities in foreign markets.
  • Risk: Most of our short volatility and variance factors rose, led by our short VIX futures strategy.
  • Momentum: Trend following strategies tended to gain both within and across asset classes. Momentum factors produced mixed results, underperforming primarily among equities.

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May 2017 Projection Review

We will begin analyzing our May hedge fund index projections next week once more of the indexes underlying our composite indexes have reported returns.

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