EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: July 24, 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 0.16% last week as as most major asset classes rose once again
  • Hedge funds are now up 0.95% for the month and 4.49% for the year
  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Stocks and bonds rose globally, but dollar depreciation led foreign assets to stronger gains
  • Equities gained 0.69% worldwide, rising in every major region
  • All of our fixed income benchmarks rose as bonds added 1.24% globally
  • Most commodity sectors gained, but energy commodities stumbled, leading our broad commodity index to a 0.10% loss
  • Developed market currencies once again rallied against the dollar, gaining 1.16%
  • Most of our short volatility and variance factors rose, led by our VIX term structure strategy’s 1.64% gain
  • Trend following and momentum factor performance varied by asset classes but was generally weak
  • We now estimate that hedge funds returned 0.23% in June, 0.10% less than our initial projection of 0.33%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.16% last week as as most major asset classes rose once again
  • Hedge funds are now up 0.95% for the month and 4.49% for the year
  • Our factor attribution analysis suggests positive weekly contributions from equity beta (0.13%), fixed income term structure (0.07%), and equity size (0.05%)
  • It indicates negative weekly contributions from developed currencies (-0.05%), lagged credit (-0.04%), and the spread between MLPs and REITs (-0.04%)
  • It estimates weekly, month-to-date, and year-to-date alphas of -0.00%, 0.09%, and -0.09%, respectively

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Strategy Performance

  • All but two of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Healthcare (0.60%), Emerging Asia (0.60%), and Managed Futures (0.45%)
  • Laggards: Equity Short-Bias (-0.65%), Europe (-0.10%), and Energy (0.01%)
  • North American funds trailed Asian funds but outperformed European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Emerging Europe (0.13%), Healthcare (0.13%), and Equity Value (0.11%)
  • Alpha laggards: Energy (-0.11%), Merger Arbitrage (-0.10%), and Equity Growth (-0.08%)

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Global Benchmarks

  • Stocks and bonds rose globally, but dollar depreciation led foreign assets to stronger gains
  • Leaders: US utilities equity (2.75%), precious metals (2.34%), and global risk parity (2.28%)
  • Laggards: oil futures (-2.08%), US MLPs (-1.75%), and energy commodities (-1.19%)
  • Equities: Equities gained 0.69% globally, rising in every major region. US stocks added 0.56% while developed and emerging market equities added 0.72% and 1.18%, respectively. Among US sectors, utilities (+2.75%) and telecom (+1.12%) performed the best and energy and industrials (both -0.49%) the worst. All of our US style indexes rose, but growth stocks outperformed value stocks. Large caps and small caps posted similar returns.
  • Bonds: All of our fixed income benchmarks rose as bonds added 1.24% worldwide. Our developed ex-US government bond index gained 2.1% to end the week as our best performing fixed income benchmark for the second straight week. 10-year US Treasuries gained 0.87%, while US inflation-linked bonds notched 0.47%. Corporate bonds also performed well, but underperformed government bonds overseas.
  • Real Estate: Real estate securities rose along with equities, gaining 0.68% in the US and 1.95% internationally.
  • Commodities: Most commodity sectors gained, but energy commodities stumbled, leading our broad commodity index to a 0.10% loss. Gold futures rose 2.17%, helping to push the precious metals sector up by 2.34%. Oil futures fell 2.08%.
  • Currencies: Developed market currencies once again rallied against the dollar, gaining 1.16%. Emerging market currencies performed more modestly, but also appreciated 0.21%.
  • Multi-Asset: All of our multi-asset class portfolios performed well, but risk parity strategies again outgained 60/40 strategies due to their embedded leverage. US-centric portfolios trailed globally diversified strategies due to currency shifts and strong foreign bond 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 developed market and US government bonds (2.32%), the spread between 10-year and 1-year European government bonds (2.20%), and the spread between global and US aggregate bonds (1.98%)
  • Laggards: currency value (-2.07%), the spread between US industrials equity and the market (-1.86%), and the spread between developed European and developed market equity (-1.27%)
  • Commodity: Alternative commodity betas struggled once again. All of our major trend following and momentum strategies declined. Although term structure bucked this trend, it gained only 0.19%.
  • Credit: Credit factors mostly fell when adjusted for duration. Investment grade bonds outperformed US Treasuries at short maturities, but trailed at five years and beyond. High yield struggled, underperforming investment grade in most regions worldwide.
  • Equity: Value and momentum factors fell globally, with the US single stock versions losing 1.02% and 0.63%, respectively. Size factors gained materially in developed markets and modestly elsewhere. Our country trend following indexes also notched gains just north of 0.50%.
  • Fixed Income: Term structure strategies rallied globally, with our 10-year/1-year spread factors adding 1.32% in the US and 2.20% in Europe. Inflation-linked securities underperformed nominal bonds in the US, but significantly outperformed overseas.
  • Foreign Exchange: Our alternative currency betas produced mixed results. Momentum gained 0.35%, but carry lost 0.98% and value plummeted 2.07%.
  • Multi-Asset: Our multi-asset class trend following factor rose 0.73%, but our momentum factors notched modest gains and losses.
  • Real Estate: Real estate securities edged out small cap equities by 0.08% in the US and 0.16% abroad.
  • Risk: Most of our short volatility and variance factors rose, led by our VIX term structure strategy’s 1.64% gain.
  • Momentum: Trend following and momentum factor performance varied by asset classes but was generally weak.

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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 0.23% in June, 0.10% 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 20 indexes and within 50 basis points for 26
  • Our hit rate was about average but our accuracy was above average
  • 13 strategies performed better than we anticipated; 15 performed worse
  • Most accurate: Relative Value (exact), Europe (exact), and Convertible Arbitrage (within 2 basis points)
  • Least accurate: Healthcare (2.03% better than expected), Energy (1.63% worse), and Commodities (0.93% better)
  • Overall, our projections were 80% more accurate than naive forecasts

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