EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: July 31, 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 0.05% last week as mixed factor performance led to modest returns
  • Hedge funds are now up 1.03% for the month and 4.42% for the year
  • All but six of the 30 hedge fund strategies we track earned positive returns
  • Large commodity gains overshadowed modest stock and bond returns
  • Equities gained 0.10% globally, losing 0.04% in the US but gaining 0.18% in foreign developed markets and 0.52% in emerging markets
  • Bonds rose 0.11% worldwide, but most of our US indexes finished the week down
  • Commodities rose 3.26% as oil futures soared 8.63%
  • Both developed and emerging market currencies appreciated against the dollar
  • Most of our short volatility and variance factors remained close to unchanged
  • Trend following and momentum factors tended to fall both within and across asset classes
  • We now estimate that hedge funds returned 0.10% in June, 0.23% less than our initial projection of 0.33%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds added 0.05% last week as mixed factor performance led to modest returns
  • Hedge funds are now up 1.03% for the month and 4.42% for the year
  • Our factor attribution analysis suggests positive weekly contributions from alpha (0.11%), lagged credit (0.04%), and the spread between developed market equities and US equities (0.04%)
  • It indicates negative weekly contributions from multi-asset class momentum (-0.05%), equity sector beta (-0.03%), and fixed income term structure (-0.02%)
  • It estimates weekly, month-to-date, and year-to-date alphas of 0.11%, 0.21%, and -0.12%, respectively

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Strategy Performance

  • All but six of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Energy (0.76%), Managed Futures (0.44%), and Emerging Asia (0.34%)
  • Laggards: Healthcare (-0.35%), Equity Long/Short (-0.14%), and Europe (-0.08%)
  • North American funds trailed Asian funds but outperformed European funds
  • Alpha was the most significant factor driving strategy returns
  • Alpha leaders: Managed Futures (0.95%), Global Macro (0.39%), and North America (0.32%)
  • Alpha laggards: Emerging Europe (-0.21%), Energy (-0.12%), and Convertible Arbitrage (-0.12%)

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Global Benchmarks

  • Large commodity gains overshadowed modest stock and bond returns
  • Leaders: oil futures (8.63%), energy commodities (7.42%), and US telecommunications equity (6.19%)
  • Laggards: US healthcare equity (-1.31%), agricultural commodities (-1.02%), and US information technology equity (-0.77%)
  • Equities: Equities gained 0.10% globally, losing 0.04% in the US but gaining 0.18% in foreign developed markets and 0.52% in emerging markets. Among US sectors, telecom (+6.19%) and energy (+1.96%) performed the best and healthcare (-1.31%) and technology (-0.77%) the worst. Our US style indexes produced mixed results, with small caps and growth stocks falling and large caps and value stocks rising slightly.
  • Bonds: Bonds rose 0.11% worldwide, but most of our US indexes finished the week down. US Treasuries, in aggregate, declined 0.27%, with the largest losses coming from longer maturities. 10-year US Treasuries dropped 0.46%. US inflation-linked bonds gained 0.05%. Our investment grade index dipped 0.25%, but our high yield index added 0.14%. Our developed ex-US government bond index gained 0.44% to end the week as our best performing fixed income benchmark for the third straight week.
  • Real Estate: Real estate securities rose, gaining 0.49% in the US and 0.90% internationally.
  • Commodities: Commodities rose 3.26% as oil futures soared 8.63%. The entire energy complex finished up 7.42%. Base metals (+3.23%) and precious metals (+1.20%) also added to the rally. Agriculture was the only major sector to decline, losing 1.02%. Gold futures rose 1.16%.
  • Currencies: Both developed and emerging market currencies appreciated against the dollar, but compared to large moves in recent weeks, the gains were relatively small.
  • Multi-Asset: Our globally diversified multi-asset class portfolios outperformed our US-centric portfolios, due mostly to poor performance from US fixed income securities. Risk parity outgained 60/40 globally, but trailed domestically.

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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 telecommunications equity and the market (5.83%), oil futures (2.63%), and commodity beta (2.06%)
  • Laggards: 1-year US sector momentum (-2.64%), 1-month commodity sector momentum (-1.69%), and commodity trend following (-1.69%)
  • Commodity: Alternative commodity betas stumbled for the third consecutive week. All of our major trend following, momentum, and term structure strategies declined, with trend following posting the largest loss, at 1.69%.
  • Credit: Credit factors mostly rose, particularly when adjusted for duration. Investment grade bonds outperformed US Treasuries at all maturities and US high yield improved upon these gains.
  • Equity: Size and value factors fell in the US and in emerging markets, but rose in foreign developed economies. Our US single stock size and value strategies lost 0.54% and 1.26%, respectively. Most of our momentum indexes also declined.
  • Fixed Income: Term structure strategies declined globally, with our 10-year/1-year spread factors losing 0.81% in the US and 0.64% in Europe. Inflation-linked securities materially outperformed nominal bonds in the US, but underperformed overseas.
  • Foreign Exchange: Our alternative currency betas produced mixed results. Value gained 1.00%, but carry and momentum lost 0.21% and 0.27%, respectively.
  • Multi-Asset: All of our multi-asset class trend following and momentum factors fell, losing between 0.59% and 1.04%.
  • Real Estate: Real estate securities edged out small cap equities by 0.57% in the US and 0.81% abroad.
  • Risk: Most of our short volatility and variance factors remained close to unchanged, even though our VIX term structure strategy did lose 1.67%.
  • Momentum: Trend following and momentum factors tended to fall both within and across asset classes.

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June 2017 Projection Review

  • All 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 0.10% in June, 0.23% 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 18 indexes and within 50 basis points for 24
  • Our hit rate was about average but our accuracy was above average
  • 12 strategies performed better than we anticipated; 18 performed worse
  • Most accurate: Europe (within 1 basis point), Relative Value (within 3 bps), and Convertible Arbitrage (within 3 bps)
  • Least accurate: Healthcare (1.78% better than expected), Energy (1.59% worse), and Latin America (1.41% worse)
  • Overall, our projections were 77% more accurate than naive forecasts

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