EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Monthly: July 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 1.16% in July as global equity gains once again fueled profits
  • Hedge funds are now up 4.55% for the year
  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Every major asset class rose as widespread strength propelled diversified portfolios to healthy gains
  • Equities rose 2.76% globally, gaining in every major region
  • Bonds performed even more strongly than equities on a risk-adjusted basis, but most of these gains came from currency moves
  • Commodities rebounded with a 3.99% gain, ending four consecutive months of drawdowns
  • Developed and emerging market currencies both appreciated materially against the dollar
  • Most of our short volatility and variance factors earned positive returns, led by our short VIX futures strategy
  • Trend following and momentum strategies tended to gain both within and across asset classes
  • 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 1.16% in July as global equity gains once again fueled profits
  • Hedge funds are now up 4.55% for the year
  • Our factor attribution analysis suggests positive monthly contributions from equity beta (0.43%), alpha (0.30%), and the spread between developed market equities and US equities (0.19%)
  • It indicates negative monthly contributions from developed currencies (-0.13%), commodity momentum (-0.04%), and high yield credit spreads (-0.04%)
  • It estimates month-to-date and year-to-date alphas of 0.30% and -0.04%, respectively

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Strategy Performance

  • All but one of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Emerging Asia (3.30%), Latin America (3.24%), and Emerging Europe (2.48%)
  • Laggards: Equity Short-Bias (-1.70%), Equity Market Neutral (0.39%), and Merger Arbitrage (0.45%)
  • North American funds trailed Asian funds but outperformed European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Managed Futures (1.15%), Equity Value (0.60%), and Commodities (0.52%)
  • Alpha laggards: Emerging Europe (-0.20%), Energy (-0.12%), and Special Situations (-0.06%)

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Global Benchmarks

  • Every major asset class rose as widespread strength propelled diversified portfolios to healthy gains
  • Leaders: oil futures (8.62%), Latin America equity (8.14%), and energy commodities (7.83%)
  • Laggards: cash (0.07%), US Treasuries (0.17%), and US 1-3-year Treasuries (0.20%)
  • Equities: Equities rose 2.76% globally, gaining in every major region. US stocks added 1.89% behind gains in telecom (+4.61%) and information technology (+3.84%). Large caps and growth stocks outperformed small caps and value stocks, respectively. Gains were even more pronounced overseas as foreign developed markets tacked on 3.04% and emerging markets soared 5.89%. Latin American equities were the largest winner, gaining 8.14%.
  • Bonds: Bonds performed even more strongly than equities on a risk-adjusted basis, trailing in absolute return only because of their lower risk. Most of these gains came from currency moves, however. Local currency returns tended to be only modestly positive. US Treasuries added 0.17%, but were outpaced by inflation-linked securities and corporate bonds.
  • Real Estate: Real estate securities joined in the broader equity rally, rising 2.37% globally. They gained 1.14% in the US and 3.83% in foreign markets.
  • Commodities: Commodities rebounded with a 3.99% gain, ending four consecutive months of drawdowns. Oil futures surged 8.62%, helping lift the energy complex to a 7.83% gain. Base metals also performed well, rising by 4.04%. Gold futures climbed 2.00% and agricultural commodities added 0.75%.
  • Currencies: Developed and emerging market currencies both appreciated materially against the dollar, gaining 3.00% and 1.24%, respectively.
  • Multi-Asset: All of our multi-asset class benchmarks posted strong returns, but risk parity strategies and globally diversified portfolios edged 60/40 strategies and US-centric portfolios, respectively. Our global risk parity index returned 4.37% when risk-adjusted to an expected annual volatility of 10%, 1.69% more than our global 60/40 index when similarly adjusted.

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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: 1-year emerging market equity sector momentum (5.71%), developed market currencies (4.82%), and the spread between developed market and US government bonds (4.17%)
  • Laggards: emerging market equity size (-3.51%), commodity trend following (-3.44%), and 1-month commodity momentum (-3.29%)
  • Commodity: All of our alternative commodity betas performed poorly. Our trend following factor gave back 3.44%, and most of our momentum factors were not far behind. Our term structure factor compared favorably, but lost 1.33% nevertheless.
  • Credit: US investment grade credit strategies gained at all maturities. High yield outperformed investment grade in the US, but lagged severely in foreign markets.
  • Equity: Size and value strategies stumbled in the US and in emerging markets, but performed well in developed foreign economies. Our US single stock size and value factors declined by 1.81% and 1.46%, respectively. Medium-term momentum strategies tended to fare well, as did trend following strategies. Our developed market country trend following factor rose 3.24%, and the emerging market version added 2.20%.
  • Fixed Income: Long 10-year, short 1-year government term structure strategies rose just 0.14% in the US and 0.49% in Europe, illustrating how the month’s outsized foreign government bond performance was due mostly to currency shifts. US 10-year inflation-linked securities outperformed 10-year Treasuries by 1.18%.
  • Foreign Exchange: Currency carry stumbled for a fourth straight month, losing 1.16%. Value declined by 2.27%, but momentum rose 1.16%.
  • Multi-Asset: All of our multi-asset class momentum and trend following factors rose, led by our trend following factor’s 2.12% Gain. Medium-term momentum added 1.06%.
  • Real Estate: Real estate securities narrowly edged small cap equities in the US, but underperformed by 0.48% abroad.
  • Risk: Most of our short volatility and variance factors earned positive returns, led by our short VIX futures strategy, which gained 2.31%.
  • Momentum: Trend following and momentum strategies tended to gain both within and across asset classes. Commodity strategies were the notable exception.

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June 2017 Projection Review

  • All of the indexes underlying our composite indexes have reported June returns
  • Hedge funds returned 0.10% in June, 0.23% less than our initial projection of 0.33%
  • We correctly predicted the direction of 27 of 30 strategies
  • We were within 25 basis points for 16 indexes and within 50 basis points for 24
  • Our hit rate was about average but our accuracy was above average
  • 10 strategies performed better than we anticipated; 20 performed worse
  • Most accurate: Europe (within 2 basis points), Relative Value (within 3 bps), and Equity Long Only (within 5 bps)
  • Least accurate: Energy (1.85% worse than expected), Healthcare (1.77% better), and Latin America (1.37% worse)
  • Overall, our projections were 75% more accurate than naive forecasts

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