EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: June 19, 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 0.22% last week as equity losses once again stifled performance
  • Hedge funds are now up 0.18% for the month and 3.59% for the year
  • Only seven of the 30 hedge fund strategies we track earned positive returns
  • Bonds and real estate rose, but equities and commodities declined as asset classes produced mixed, but muted returns
  • Equities fell 0.13% globally, but were close to flat in most regions
  • Aside from our US inflation-linked securities index, all of our fixed income benchmarks rose
  • Every major commodity sector stumbled as our broad commodity index lost 1.48%
  • Developed market currencies appreciated 0.40% against the dollar
  • Performance varied among our short volatility and variance factors, but both the gains and losses were small
  • Trend following and medium-term momentum strategies fell within and across most asset classes
  • We now estimate that hedge funds returned 0.50% in May, 0.07% less than our initial projection of 0.57%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.22% last week as equity losses once again stifled performance
  • Hedge funds are now up 0.18% for the month and 3.59% for the year
  • Our factor attribution analysis suggests positive weekly contributions from alpha (0.12%), fixed income term structure (0.01%), and the risk-free rate (0.01%)
  • It indicates negative weekly contributions from the spread between emerging market and developed market equities (-0.06%), the spread between MLPs and REITs (-0.06%), and equity sector beta (-0.05%)
  • It estimates weekly, month-to-date, and year-to-date alphas of 0.12%, 0.07%, and 0.07%, respectively

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Strategy Performance

  • Only seven of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Merger Arbitrage (0.18%), Equity Short-Bias (0.16%), and Latin America (0.09%)
  • Laggards: Emerging Europe (-0.93%), Emerging Asia (-0.77%), and Energy (-0.67%)
  • North American funds trailed Asian funds but outperformed European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Special Situations (0.33%), Event Driven (0.33%), and Credit (0.22%)
  • Alpha laggards: Managed Futures (-0.39%), Global Macro (-0.13%), and Equity Short-Bias (-0.12%)

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Global Benchmarks

  • Bonds and real estate rose, but equities and commodities declined as asset classes produced mixed, but muted returns
  • Leaders: US utilities equity (1.67%), US REITs (1.62%), and US industrials equity (1.35%)
  • Laggards: oil futures (-2.36%), US MLPs (-2.20%), and emerging EMEA equity (-2.07%)
  • Equities: Equities fell 0.13% globally, but were close to flat in most regions, with emerging Asia and emerging Europe the notable exceptions. In the US, utilities and industrials were the best performing sectors. Technology and materials were the worst. Large caps and value stocks squeezed out modest profits, but small caps and growth stocks declined.
  • Bonds: Aside from our US inflation-linked securities index, all of our fixed income benchmarks rose. Our 10-year US Treasury index was the best performer, followed by our US investment grade and foreign government bond indexes.
  • Real Estate: US REITS added 1.62% and foreign real estate securities rose 0.77% as markets rewarded real estate risk globally.
  • Commodities: Every major commodity sector stumbled as our broad index lost 1.48%. Oil futures dropped 2.36% and gold futures gave back 1.15%.
  • Currencies: Developed market currencies appreciated 0.40% against the dollar but emerging market currencies depreciated 0.09%.
  • Multi-Asset: Our multi-asset class benchmarks generated modest gains. Risk parity strategies outperformed 60/40, and US-centric portfolios led globally diversified 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 industrials equity and the market (2.32%), the spread between US REITs and small cap equities (1.71%), and emerging market equity value (1.60%)
  • Laggards: the spread between US 10-year inflation-linked bonds and 10-year US Treasuries (-2.56%), the spread between US inflation-linked bonds and US Treasuries (-2.36%), and the spread between US information technology equity and the market (-1.72%)
  • Commodity: Most of our alternative commodity betas fell, with term structure losing 0.91% and 1-year sector momentum declining 1.50%.
  • Credit: Corporate bonds struggled to match government bonds worldwide. High yield underperformed investment grade in the US, but slightly outperformed overseas.
  • Equity: Size and value factors declined in the US but rose overseas. 1-year momentum strategies struggled globally regardless of whether they operated over single stocks, sector indexes, or country indexes. Trend following strategies also fell.
  • Fixed Income: Term structure strategies gained globally, but performed much better in the US than in Europe. US inflation-linked securities strongly underperformed Treasuries, lagging by 2.56% at the 10-year maturity.
  • Foreign Exchange: All of our currency alternative betas performed rose, but the gains were modest. Carry added 0.58% and value tacked on 0.21%.
  • Multi-Asset: Our multi-asset class momentum and trend following factors generated mixed, but muted returns. Short-term momentum posted small gains, but medium-term momentum and trend following strategies fell.
  • Real Estate: Real estate securities surged past small cap equities worldwide, outgaining them by 1.71% in the US and 1.32% in foreign markets.
  • Risk: Performance varied among our short volatility and variance factors. Our VIX term structure strategy lost 0.72%, but most of our other US indexes earned small profits.
  • Momentum: Trend following and medium-term momentum strategies fell within and across most asset classes.

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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 0.50% in May, 0.07% 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 18 indexes and within 50 basis points for 23
  • Our hit rate was about average but our accuracy was above average
  • 13 strategies performed better than we anticipated; 17 performed worse
  • Most accurate: Credit (within 1 basis point), Multi-Strategy (within 1 bp), and North America (within 5 bps)
  • Least accurate: Healthcare (2.10% worse than expected), Commodities (1.03% worse), and Emerging Europe (0.91% worse)
  • Overall, our projections were 63% more accurate than naive forecasts

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