EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: July 17, 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 0.80% last week as equities rallied globally
  • Hedge funds are now up 0.83% for the month and 4.34% for the year
  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Every one of our major asset class indexes rose as markets rebounded strongly from last week’s losses
  • Equities rose 2.09% globally, climbing in every major region and surging in emerging markets
  • All of our fixed income benchmarks gained as foreign government bonds added 1.14%
  • Oil and other energy commodities soared, leading our broad commodity index to a 1.90% gain
  • Both developed and emerging market currencies surged by more than 1% against the dollar
  • Most of our short volatility and variance factors rose, led by our short VIX futures strategy’s 1.64% gain
  • Intra-asset class momentum factors tended to underperform, but inter-asset class strategies and trend following factors mostly rose
  • We now estimate that hedge funds returned 0.22% in June, 0.11% less than our initial projection of 0.33%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.80% last week as equities rallied globally
  • Hedge funds are now up 0.83% for the month and 4.34% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.32%), the spread between developed market equities and US equities (0.18%), and the spread between emerging market and developed market equities (0.08%)
  • It indicates negative weekly contributions from developed currencies (-0.06%), agricultural commodity beta (-0.02%), and equity region beta (-0.01%)
  • It estimates weekly, month-to-date, and year-to-date alphas of 0.04%, 0.13%, and -0.05%, respectively

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Strategy Performance

  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Latin America (2.77%), Emerging Europe (2.75%), and Emerging Asia (2.09%)
  • Laggards: Equity Short-Bias (-1.35%), Equity Market Neutral (0.23%), and Merger Arbitrage (0.23%)
  • North American funds trailed Asian funds but outperformed European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Managed Futures (0.55%), Commodities (0.22%), and Global Macro (0.21%)
  • Alpha laggards: Event Driven (-0.15%), Energy (-0.08%), and Equity Growth (-0.07%)

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Global Benchmarks

  • Every one of our major asset class indexes rose as markets rebounded strongly from last week’s losses
  • Leaders: Latin America equity (6.56%), emerging EMEA equity (5.99%), and oil futures (5.29%)
  • Laggards: agricultural commodities (-2.00%), US telecommunications equity (-0.98%), and US financials equity (-0.21%)
  • Equities: Equities rose 2.09% globally, climbing in every major region. Stocks gained 1.38% in the US, but added 2.45% in foreign developed markets and 4.20% in emerging markets. Among US sectors, technology (+3.70%) and materials (+2.46%) performed the best and telecom (-0.98%) and financials (-0.21%) the worst. All of our US style indexes rose, but large caps and growth stocks outperformed small caps and value stocks, respectively.
  • Bonds: All of our fixed income benchmarks rose as bonds added 0.86% worldwide. Our developed ex-US government bond index added 1.14% to end the week as our best performing fixed income benchmark. 10-year US Treasuries gained 0.61%, while US inflation-linked bonds notched 0.57%. Corporate bonds also performed well, but underperformed government bonds worldwide.
  • Real Estate: Real estate securities rallied globally, adding 1.24% in the US and 2.17% abroad.
  • Commodities: Oil and other energy commodities soared, leading our broad commodity index to a 1.90% gain. Agricultural commodities stumbled, but were the only major sector to decline. Oil futures added 5.29% and gold futures tacked on 1.48%.
  • Currencies: Both developed and emerging market currencies surged against the dollar, gaining 1.36% and 1.11%, respectively.
  • Multi-Asset: All of our multi-asset class portfolios performed well, but risk parity strategies outperformed 60/40 due to their embedded leverage. US-centric portfolios trailed globally diversified strategies due to currency shifts and strong foreign equity performance.

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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 information technology equity and the market (3.01%), 1-year emerging market equity sector momentum (2.26%), and developed market currencies (2.21%)
  • Laggards: emerging market equity size (-3.43%), the spread between US telecommunications equity and the market (-2.18%), and 1-month commodity sector momentum (-2.03%)
  • Commodity: Almost all of our alternative commodity beta indexes fell, with only term structure holding value. Trend following dropped 1.77% and short-term momentum strategies struggled both at the sector (-2.03%) and individual contract (-1.88%) levels.
  • Credit: Credit factors mostly gained. Investment grade bonds outperformed US Treasuries on both an outright and duration-adjusted basis. High yield outgained investment grade in the US and in emerging markets, but lagged in foreign developed markets.
  • Equity: Size and value factors fell in most regions worldwide, with the US single stock versions losing 0.34% and 0.36%, respectively. Although momentum factors also tended to struggle, our trend following indexes performed strongly. Our developed country trend following strategy gained 2.15%.
  • Fixed Income: Term structure strategies rose globally, with our 10-year/1-year spread factors adding 0.79% in the US and 0.96% in Europe. Inflation-linked securities outperformed nominal bonds in the US, but trailed significantly overseas.
  • Foreign Exchange: Our alternative currency betas produced mixed results. Carry gained 1.77%, but value lost 1.50%. Momentum was nearly flat, adding just 0.09%.
  • Multi-Asset: Our multi-asset class trend following factor rose 1.53% and our medium-term momentum factor added 1.03%.
  • Real Estate: Real estate securities outgained small cap equities by 0.13% in the US, but trailed by 0.37% abroad.
  • Risk: Most of our short volatility and variance factors rose, led by our short VIX futures strategy’s 1.64% gain. Our VIX term structure strategy was the only factor to decline.
  • Momentum: Intra-asset class momentum factors tended to underperform, but inter-asset class strategies and trend following factors mostly rose.

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June 2017 Projection Review

  • Most of the indexes underlying our composite indexes have reported June returns, but our analysis is still preliminary and subject to change
  • We now estimate that hedge funds returned 0.22% in June, 0.11% less than our initial projection of 0.33%
  • As of this moment, we correctly predicted the direction of 27 of 30 strategies
  • We were within 25 basis points for 15 indexes and within 50 basis points for 25
  • Our hit rate was about average but our accuracy was above average
  • 18 strategies performed better than we anticipated; 12 performed worse
  • Most accurate: Relative Value (within 1 basis point), Emerging Markets (within 1 bp), and Equity Long/Short (within 1 bp)
  • Least accurate: Healthcare (2.92% better than expected), Commodities (1.10% better), and Energy (0.90% worse)
  • Overall, our projections were 77% more accurate than naive forecasts

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