EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: July 3, 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 0.20% last week as global equity losses hampered returns
  • Hedge funds are now up 0.38% for the month and 3.66% for the year
  • 18 of the 30 hedge fund strategies we track earned positive returns
  • Commodities soared, but most asset classes fell globally as diversified portfolios struggled to remain in the black
  • Equities dipped 0.28% globally, falling in most regions and sectors
  • US fixed income securities struggled and were among our worst performing global benchmarks on a risk-adjusted basis
  • Commodities surged, gaining 4.50% as oil futures added more than 7%
  • Developed market currencies rallied, gaining 1.32% against the dollar
  • All of our short volatility and variance factors declined
  • Trend following and medium-term momentum strategies stumbled within and across most asset classes
  • We now estimate that hedge funds returned 0.38% in May, 0.19% less than our initial projection of 0.57%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.20% last week as global equity losses hampered returns
  • Hedge funds are now up 0.38% for the month and 3.66% for the year
  • Our factor attribution analysis suggests positive weekly contributions from the spread between MLPs and REITs (0.08%), the spread between developed market equities and US equities (0.06%), and agricultural commodity beta (0.05%)
  • It indicates negative weekly contributions from equity beta (-0.12%), fixed income term structure (-0.11%), and developed currencies (-0.05%)
  • It estimates weekly, month-to-date, and year-to-date alphas of -0.03%, 0.06%, and -0.09%, respectively

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Strategy Performance

  • 18 of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (0.80%), Special Situations (0.53%), and Emerging Europe (0.46%)
  • Laggards: Managed Futures (-2.12%), Healthcare (-0.68%), and Global Macro (-0.63%)
  • North American funds outperformed both Asian and European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Special Situations (0.27%), Merger Arbitrage (0.20%), and Equity Value (0.19%)
  • Alpha laggards: Managed Futures (-1.05%), Global Macro (-0.32%), and Energy (-0.29%)

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Global Benchmarks

  • Commodities soared, but most asset classes fell globally as diversified portfolios struggled to remain in the black
  • Leaders: oil futures (7.07%), energy commodities (6.47%), and agricultural commodities (5.68%)
  • Laggards: US information technology equity (-3.00%), US utilities equity (-2.18%), and US risk parity (-1.96%)
  • Equities: Equities dipped 0.28% globally, falling in most regions. Latin America was the notable exception as it rose 2%. Most US sectors finished down, but MLPs (+4.61%) and financials (+2.46%) managed sizable gains. US large caps and growth stocks declined, while small caps and value stocks rose.
  • Bonds: US fixed income securities struggled and were among our worst performing global benchmarks on a risk-adjusted basis. 10-year Treasuries gave back 1.42%, while US inflation-linked bonds fell by 0.74%. US investment grade bonds declined by 0.61%, but high yield securities actually rose 0.15%.
  • Real Estate: Real estate securities fell worldwide, losing 1.15% in the US and 0.86% abroad.
  • Commodities: Commodities surged, gaining 4.50% as oil futures added more than 7%. Most sectors gained. Precious metals was the lone loser as gold futures gave back 1.10%. Agricultural commodities (+5.68%) joined energy commodities (+6.47%) in posting a very strong week.
  • Currencies: Developed market currencies rallied, gaining 1.32% against the dollar. Emerging market currencies also appreciated, but by a much less significant 0.18%.
  • Multi-Asset: All of our multi-asset class portfolios struggled. Risk parity strategies underperformed 60/40 as leveraged bond exposure exacerbated losses. Globally diversified portfolios outperformed US-centric strategies.

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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: US equity value (3.48%), the spread between US financials equity and the market (3.41%), and developed market equity value (2.92%)
  • Laggards: the spread between 10-year and 1-year European government bonds (-3.34%), the spread between US information technology equity and the market (-3.32%), and currency carry (-3.00%)
  • Commodity: All of our alternative commodity betas fell, and most suffered large losses. Term structure, trend following, and medium-term momentum factors all declined by at least 2.16%.
  • Credit: US investment grade securities materially outperformed Treasuries after adjusting for duration. High yield bonds outgained investment grade bonds in the US and in emerging markets.
  • Equity: Value factors posted strong returns worldwide, gaining more than 2% in the US, developed markets, and emerging markets. Size factors were less lucrative, but still notched gains in each market. Trend following strategies were mostly flat, while momentum factors tended to produce losses.
  • Fixed Income: Term structure strategies suffered globally, with our 10-year/1-year spread factors losing 2.22% in the US and 3.34% in Europe. Inflation-linked securities modestly outperformed nominal bonds in the US, but trailed overseas.
  • Foreign Exchange: Currency carry was among this week’s worst performing factors as it declined by 3%. Value also fell, losing 0.40%. Momentum produced a modest gain of 0.16%, however.
  • Multi-Asset: All of our multi-asset class momentum and trend following factors fell, losing between 0.76% and 1.51%.
  • Real Estate: Real estate securities trailed small cap equities worldwide, underperforming by 0.91% in the US and 1.12% abroad.
  • Risk: All of our short volatility and variance factors declined, with our VIX futures term structure strategy posting the largest loss.
  • Momentum: Trend following and medium-term momentum strategies stumbled within and across most asset classes.

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May 2017 Projection Review

  • All 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 0.38% in May, 0.19% less than our initial projection of 0.57%
  • As of this moment, we correctly predicted the direction of 24 of 30 strategies
  • We were within 25 basis points for 17 indexes and within 50 basis points for 20
  • Our hit rate was below average but our accuracy was above average
  • 10 strategies performed better than we anticipated; 20 performed worse
  • Most accurate: Managed Futures (within 1 basis point), Event Driven (within 3 bps), and Credit (within 3 bps)
  • Least accurate: Healthcare (2.39% worse than expected), Emerging Europe (1.86% worse), and Energy (1.85% worse)
  • Overall, our projections were 50% more accurate than naive forecasts

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