EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: June 12, 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 0.04% last week as equity losses and negative alpha stifled performance
  • Hedge funds are now up 0.42% for the month and 3.85% for the year
  • 14 of the 30 hedge fund strategies we track earned positive returns
  • Most major asset classes struggled, leading all of our long-only multi-asset class indexes downward
  • Equities fell 0.43% globally, with losses in most major regions, including the US, Europe, and Asia
  • Almost all of our global bond benchmarks fell, with only foreign high yield earning a positive return
  • Energy losses crippled commodity performance as our broad index fell 0.64%
  • Developed market currencies appreciated a modest 0.02% against the US dollar
  • Our short volatility and variance factors produced mixed, but muted performance
  • Most of our trend following strategies struggled; momentum factors fared better but still declined in several asset classes
  • We now estimate that hedge funds returned 0.51% in May, 0.06% less than our initial projection of 0.57%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.04% last week as equity losses and negative alpha stifled performance
  • Hedge funds are now up 0.42% for the month and 3.85% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity sector beta (0.06%), the spread between emerging market and developed market equities (0.06%), and fixed income term structure (0.03%)
  • It indicates negative weekly contributions from the spread between developed market equities and US equities (-0.13%), alpha (-0.08%), and equity beta (-0.05%)
  • It estimates weekly, month-to-date, and year-to-date alphas of -0.08%, -0.01%, and -0.01%, respectively

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Strategy Performance

  • 14 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Asia (0.71%), Energy (0.59%), and Healthcare (0.31%)
  • Laggards: Managed Futures (-0.48%), Technology (-0.46%), and Emerging Europe (-0.39%)
  • North American funds trailed Asian funds but outperformed European funds
  • The spread between developed market equities and US equities was the most significant factor driving strategy returns
  • Alpha leaders: Emerging Asia (0.11%), Merger Arbitrage (0.08%), and Equity Value (0.03%)
  • Alpha laggards: Managed Futures (-0.72%), Global Macro (-0.27%), and Emerging Europe (-0.14%)

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Global Benchmarks

  • Most major asset classes struggled, leading all of our long-only multi-asset class indexes downward
  • Leaders: US financials equity (2.92%), agricultural commodities (2.80%), and US energy equity (1.94%)
  • Laggards: oil futures (-3.83%), energy commodities (-3.30%), and US information technology equity (-2.27%)
  • Equities: Equities fell 0.43% globally, with losses in most major regions, including the US, Europe, and Asia. US sector performance varied, with energy and financials posting strong gains while technology and consumer discretionary notched sizable losses. Style indexes were also mixed, with US small caps and value stocks rising and large caps and growth stocks falling.
  • Bonds: Almost all of our global bond benchmarks fell, with only foreign high yield earning a positive return. The losses were relatively small, however. The largest, by our 10-year US Treasury index, was a modest 0.50%.
  • Real Estate: US REITS gained 0.37%, but real estate securities stumbled abroad, losing 0.68%.
  • Commodities: Energy losses crippled commodity performance as our broad index fell 0.64%. Oil futures declined by 3.83%, dwarfing the 2.80% and 0.76% gains by agricultural commodities and base metals, respectively.
  • Currencies: Currency returns were muted as developed market currencies appreciated only 0.02% against the US dollar. Emerging market currencies depreciated by 0.18%.
  • Multi-Asset: All of our multi-asset class benchmarks generated losses, but risk parity underperformed 60/40 on both an absolute and risk-adjusted basis. Global portfolios declined more than US-centric 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: the spread between US financials equity and the market (3.66%), US equity index value (2.93%), and US equity value (2.37%)
  • Laggards: the spread between US consumer discretionary equity and the market (-2.86%), the spread between US information technology equity and the market (-2.84%), and 1-month US sector momentum (-2.67%)
  • Commodity: All of our alternative commodity betas fell, with trend following, term structure, and momentum strategies all declining.
  • Credit: Markets rewarded credit risk in developed markets. US investment grade factors earned the largest gains, but high yield also did well both in the US and abroad.
  • Equity: There was no consistent global theme as size, value, momentum, and trend following factor performance varied by region. Size, value, and single stock momentum strategies all gained in the US, however.
  • Fixed Income: Term structure strategies gained 1.25% in Europe, but fell 0.65% in the US. Inflation-linked securities underperformed nominal bonds.
  • Foreign Exchange: All of our currency alternative betas performed well. Carry gained 2.17%, while value and momentum earned 1.26% and 0.73%, respectively.
  • Multi-Asset: Our multi-asset class momentum and trend following factors generated mixed, but muted returns. Momentum strategies posted small gains while our trend following factor fell 0.15%.
  • Real Estate: US REITs lagged domestic small caps by 0.39%, but real estate securities outperformed small caps by 0.27% in foreign markets.
  • Risk: Our option writing and short variance factors produced modest gains, but our short VIX futures strategies each notched small losses.
  • Momentum: Most of our trend following strategies declined. Momentum strategies fared better, but still struggled among commodities and US equity sectors.

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May 2017 Projection Review

  • Most of the indexes underlying our composite indexes have reported May returns, but our analysis is still preliminary and subject to change
  • We now estimate that hedge funds returned 0.51% in May, 0.06% less than our initial projection of 0.57%
  • As of this moment, we correctly predicted the direction of 26 of 30 strategies
  • We were within 25 basis points for 16 indexes and within 50 basis points for 20
  • Our hit rate was about average but our accuracy was above average
  • 13 strategies performed better than we anticipated; 17 performed worse
  • Most accurate: Convertible Arbitrage (within 1 basis point), Relative Value (within 6 bps), and Hedge Funds (within 6 bps)
  • Least accurate: Healthcare (2.37% worse than expected), Technology (1.35% better), and Special Situations (1.32% better)
  • Overall, our projections were 56% more accurate than naive forecasts

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