EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: June 2017

The following is an excerpt from our Hedge Funds Monthly 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 0.33% in June as global equity gains fueled profits
  • Hedge funds are now up 3.61% for the year
  • All but six of the 30 hedge fund strategies we track earned positive returns
  • Domestic equity strength helped propel diversified portfolios to modest gains even as fixed income securities and commodities stumbled
  • Equities rose 0.65% globally, but performed weakly in Europe and in several US sectors
  • Most US government bond indexes finished down, with inflation-linked securities suffering the largest losses
  • Despite a late rally, commodities fell for the fourth straight month, declining 0.88% as oil futures dropped 5.14%
  • Developed and emerging market currencies both appreciated against the dollar
  • Most of our short volatility and variance factors earned positive returns
  • Trend following strategies fell in and across most asset classes, while momentum strategies produced mixed results
  • Hedge funds returned 0.37% in May, 0.20% less than our initial projection of 0.57%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.33% in June as global equity gains fueled profits
  • Hedge funds are now up 3.61% for the year
  • Our factor attribution analysis suggests positive monthly contributions from equity beta (0.19%), equity sector beta (0.14%), and the risk-free rate (0.08%)
  • It indicates negative monthly contributions from the spread between developed market equities and US equities (-0.11%), developed currencies (-0.07%), and the spread between MLPs and REITs (-0.04%)
  • It estimates month-to-date and year-to-date alphas of 0.02% and -0.14%, respectively

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Strategy Performance

  • All but six of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (2.81%), Emerging Asia (1.70%), and Equity Value (1.08%)
  • Laggards: Managed Futures (-1.82%), Emerging Europe (-1.06%), and Equity Short-Bias (-1.04%)
  • North American funds trailed Asian funds but outperformed European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Equity Value (0.39%), Emerging Asia (0.38%), and Credit (0.36%)
  • Alpha laggards: Managed Futures (-1.68%), Emerging Europe (-0.53%), and Energy (-0.51%)

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Global Benchmarks

  • Domestic equity strength helped propel diversified portfolios to modest gains even as fixed income securities and commodities stumbled
  • Leaders: US financials equity (5.36%), US healthcare equity (4.94%), and base metals (3.45%)
  • Laggards: oil futures (-5.14%), energy commodities (-4.27%), and precious metals (-2.86%)
  • Equities: Equities rose 0.65% globally, but performed weakly in Europe, where developed market stocks fell 1.01% and emerging market equities lost 2.05%. US stocks gained 0.88% behind strength in financials (+5.36%) and healthcare (+4.94%). More sectors lost than gained, however, and several posted losses in excess of 2%. Small caps and value stocks outperformed large caps and growth stocks, respectively.
  • Bonds: Most US government indexes finished down, with inflation-linked securities suffering the largest losses. Our US investment grade and high yield indexes produced modest gains, however. International indexes were mixed, with developed market government bonds managing small profits and emerging market bonds small losses.
  • Real Estate: Real estate surged 2.26% domestically, but fell 0.87% abroad, leading to a 0.91% global return.
  • Commodities: Despite a late rally, commodities fell for the fourth straight month, declining 0.88% as oil futures dropped 5.14%. Energy commodities, collectively, finished down 4.27% and precious metals lost 2.86%, overpowering the 3.45% and 2.84% gains by base metals and agricultural commodities, respectively.
  • Currencies: Developed and emerging market currencies both appreciated against the dollar, gaining 1.77% and 0.64%, respectively.
  • Multi-Asset: All of our multi-asset class benchmarks notched modest gains, producing similar returns regardless of regional concentration or allocation methodology (i.e., 60/40 or risk parity).

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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 (5.17%), the spread between US healthcare equity and the market (4.54%), and US equity value (4.24%)
  • Laggards: the spread between US information technology equity and the market (-4.76%), VIX futures term structure (-3.43%), and the spread between US consumer staples equity and the market (-3.29%)
  • Commodity: Our alternative commodity betas produced mixed results, but were losers, on average. Our trend following factor gave back 1.03%, while our medium-term sector momentum strategy fell by 1.58%.
  • Credit: US investment grade credit strategies gained at all maturities, but our high yield factor and most of our foreign credit strategies declined.
  • Equity: Size and value strategies produced strong results in developed markets. Our US single stock value factor added 4.24% and our US index-based size factor tacked on 2.92%. Momentum strategies were less fortunate, with our US single stock momentum factor declining 1.60%. Trend following strategies were flat in developed markets, but gained 1.44% in emerging markets.
  • Fixed Income: Long 10-year, short 1-year government term structure strategies lost 1.09% in the US and 0.99% in Europe. Most of our other fixed income strategies also finished down. US 10-year inflation-linked securities underperformed 10-year Treasuries by 2.06%, while foreign inflation-linked securities underperformed nominal bonds by 1.08%.
  • Foreign Exchange: Currency carry stumbled for a third straight month, losing 1.04%. Value declined by 0.50%, but momentum rose 1.20%.
  • Multi-Asset: Our medium-term multi-asset class momentum factor added 0.92%, but our trend following factor fell 0.51%.
  • Real Estate: Real estate securities underperformed small cap equities worldwide, losing 0.41% in the US and 1.49% abroad on a relative basis.
  • Risk: Most of our short volatility and variance factors earned positive returns, but our VIX futures term structure factor lost 3.43%, finishing the month as one of our worst performing Market Factors.
  • Momentum: Trend following strategies fell in and across most asset classes, while momentum strategies produced mixed results.

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May 2017 Projection Review

  • All of the indexes underlying our composite indexes have reported May returns
  • Hedge funds returned 0.37% in May, 0.20% less than our initial projection of 0.57%
  • 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
  • Nine strategies performed better than we anticipated; 20 performed worse
  • Most accurate: Managed Futures (exact), Credit (within 3 basis points), and Relative Value (within 5 bps)
  • Least accurate: Healthcare (2.39% worse than expected), Energy (1.96% worse), and Emerging Europe (1.86% worse)
  • Overall, our projections were 50% more accurate than naive forecasts

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