EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: June 26, 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 0.40% last week as healthcare and technology stocks fueled profits
  • Hedge funds are now up 0.63% for the month and 3.95% for the year
  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Stocks and bonds posted modest gains, but commodities stumbled as an already bad month for oil worsened
  • Equities rose only 0.21% globally but exhibited significant dispersion at the sector level
  • Fixed income performance was relatively muted despite a rebound among inflation-linked securities
  • Commodities struggled, losing 2.38%, as energy commodities fell 3.82% and agricultural commodities gave back 4.03%
  • Developed and emerging market currencies both depreciated against the dollar
  • Most of our short volatility and variance factors gained, led by our short VIX futures strategy
  • Trend following and medium-term momentum strategies rose within and across most asset classes
  • We now estimate that hedge funds returned 0.39% in May, 0.18% less than our initial projection of 0.57%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.40% last week as healthcare and technology stocks fueled profits
  • Hedge funds are now up 0.63% for the month and 3.95% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity sector beta (0.10%), commodity momentum (0.06%), and equity beta (0.05%)
  • It indicates negative weekly contributions from the spread between developed market equities and US equities (-0.05%), agricultural commodity beta (-0.04%), and high yield credit spreads (-0.02%)
  • It estimates weekly, month-to-date, and year-to-date alphas of 0.03%, 0.15%, and 0.04%, respectively

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Strategy Performance

  • All but four of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (2.04%), Emerging Asia (0.94%), and Managed Futures (0.93%)
  • Laggards: Latin America (-0.83%), Energy (-0.54%), and Equity Short-Bias (-0.34%)
  • North American funds outperformed Asian funds but trailed European funds
  • Equity sector beta was the most significant factor driving strategy returns
  • Alpha leaders: Managed Futures (0.69%), Global Macro (0.20%), and Fund of Funds (0.13%)
  • Alpha laggards: Emerging Europe (-0.35%), Technology (-0.29%), and Asia (-0.14%)

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Global Benchmarks

  • Stocks and bonds posted modest gains, but commodities stumbled as an already bad month for oil worsened
  • Leaders: US healthcare equity (3.78%), US information technology equity (2.47%), and base metals (2.45%)
  • Laggards: oil futures (-4.34%), agricultural commodities (-4.03%), and energy commodities (-3.82%)
  • Equities: Equities rose only 0.21% globally but varied considerably by sector. US healthcare stocks rose 3.78%, while energy and telecom equities each fell 2.83%. Growth trounced valued. Developed market stocks were close to flat, while emerging market equities gained in Asia and Europe and fell in Latin America.
  • Bonds: Fixed income performance was relatively muted, but US inflation-linked securities did gain 0.51%. US investment grade bonds added 0.32%, but high yield stumbled by the same amount.
  • Real Estate: US REITs were roughly flat, but foreign real estate securities fell by 1.54%.
  • Commodities: Commodities struggled, losing 2.38%. Energy commodities lost 3.82% as oil futures dipped 4.34%. Agricultural commodities declined by more than 4%. Precious metals were unchanged, but base metals broke from the herd and added 2.45%.
  • Currencies: Developed and emerging market currencies both depreciated against the dollar, losing 0.15% and 0.36%, respectively.
  • 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 healthcare equity and the market (4.00%), commodity term structure (3.47%), and the spread between US information technology equity and the market (2.99%)
  • Laggards: US equity index value (-3.26%), the spread between US telecommunications equity and the market (-2.85%), and the spread between developed market real estate securities and small cap equities (-2.26%)
  • Commodity: Most of our alternative commodity factors gained, with term structure and medium-term momentum strategies producing large profits. Trend following factors were less lucrative, but still rose.
  • Credit: Investment grade bonds tended to outperform government securities, but high yield struggled globally.
  • Equity: Value substantially underperformed growth, struggling abroad and losing 3.26% on a relative basis in the US. Size factors were mixed, earning small profits in developed markets, but losing in emerging markets. Momentum and trend following factors mostly declined in developed markets.
  • Fixed Income: Term structure strategies gained globally, with our 10-year/1-year spread factors earning 0.23% in the US and 0.75% in Europe. 10-year inflation linked securities outgained 10-year US Treasuries by 0.67%.
  • Foreign Exchange: All of our currency alternative betas performed fell, with momentum and value each losing more than 0.50%.
  • Multi-Asset: Each of our multi-asset class momentum and trend following factors rose, adding between 0.65% and 0.94%.
  • Real Estate: Real estate securities trailed small cap equities worldwide, underperforming by 0.21% in the US and 2.26% abroad.
  • Risk: Most of our short volatility and variance factors gained, led by our short VIX futures strategy’s 0.59% profit.
  • Momentum: Trend following and medium-term momentum strategies rose 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 0.39% in May, 0.18% less than our initial projection of 0.57%
  • As of this moment, we correctly predicted the direction of 23 of 30 strategies
  • We were within 25 basis points for 18 indexes and within 50 basis points for 21
  • Our hit rate was below average but our accuracy was above average
  • Nine strategies performed better than we anticipated; 20 performed worse
  • Most accurate: Managed Futures (exact), Credit (within 2 basis points), and Asia (within 3 bps)
  • Least accurate: Healthcare (1.98% worse than expected), Energy (1.17% worse), and Commodities (1.12% worse)
  • Overall, our projections were 59% more accurate than naive forecasts

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