EQIRA: Empirical and Quantitative Investment Research and Analysis

Hedge Funds Weekly: August 14, 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 fell 0.65% last week as equity losses stifled returns
  • Hedge funds are now down 0.53% for the month and up 3.89% for the year
  • Only one of the 30 hedge fund strategies we track earned positive returns
  • Equities stumbled worldwide, driving most risky assets and their accompanying portfolios into the red
  • Equities lost 1.58% globally, declining in every major region
  • Government bonds benefited from equity woes, gaining 0.44% in the US and 0.88% in developed foreign markets
  • Despite meaningful gains from precious and base metals, commodities suffered minor losses due largely to a 1.54% decline in oil futures
  • Developed market currencies appreciated 0.40% against the dollar while emerging currencies were nearly flat
  • Almost all of our short volatility and variance factors fell, paced by our short VIX futures strategy’s 3.60% loss
  • Most trend following and momentum factors declined, both within and across asset classes
  • We now estimate that hedge funds returned 1.05% in July, 0.11% less than our initial projection of 1.16%

Global Hedge Fund Performance

  • Our factor-based projections estimate that hedge funds fell 0.65% last week as equity losses stifled returns
  • Hedge funds are now down 0.53% for the month and up 3.89% for the year
  • Our factor attribution analysis suggests positive weekly contributions from fixed income term structure (0.04%), lagged equity (0.03%), and gold beta (0.03%)
  • It indicates negative weekly contributions from equity beta (-0.37%), multi-asset class momentum (-0.07%), and equity sector beta (-0.05%)
  • It estimates weekly, month-to-date, and year-to-date alphas of -0.05%, -0.08%, and -0.17%, respectively

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Strategy Performance

  • Only one of the 30 hedge fund strategies we track earned positive returns
  • Leaders: Equity Short-Bias (1.61%), Merger Arbitrage (-0.14%), and Equity Market Neutral (-0.15%)
  • Laggards: Emerging Asia (-1.57%), Energy (-1.36%), and Equity Long Only (-1.25%)
  • North American funds trailed Asian funds but outperformed European funds
  • Equity beta was the most significant factor driving strategy returns
  • Alpha leaders: Credit (0.14%), Merger Arbitrage (0.13%), and Event Driven (0.12%)
  • Alpha laggards: Managed Futures (-0.81%), Global Macro (-0.28%), and Commodities (-0.27%)

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Global Benchmarks

  • Equities stumbled worldwide, driving most risky assets and their accompanying portfolios into the red
  • Leaders: precious metals (2.76%), base metals (2.70%), and gold futures (2.35%)
  • Laggards: US MLPs (-3.99%), US energy equity (-2.85%), and emerging Asia equity (-2.65%)
  • Equities: Equities lost 1.58% globally, declining in every major region. US and developed foreign stocks performed similarly, each losing around 1.50%. Emerging market equities fell 2.20%. Among US sectors, consumer staples (+1.47%) and utilities (-0.25%) performed the best and energy (-2.85%) and financials (-2.61%) the worst. Our US style indexes all declined, with small caps and value stocks falling the farthest.
  • Bonds: Government bonds benefited from equity woes, gaining 0.44% in the US and 0.88% in developed foreign markets. Corporate bonds did not fare as well, with our US investment grade and high yield indexes losing 0.07% and 0.80%, respectively. Corporate bonds also declined overseas.
  • Real Estate: Real estate securities joined in equity losses, falling by 2.21% in the US and 1.14% abroad. They lost 1.70% globally.
  • Commodities: Despite meaningful gains from precious and base metals, commodities suffered minor losses due largely to a 1.54% decline in oil futures. Our broad commodity index slipped 0.10%. Base metals and precious metals each gained at least 2.70%. Gold futures added 2.35%.
  • Currencies: Developed market currencies appreciated 0.40% against the dollar. Emerging currencies were nearly flat, depreciating by just 0.03%.
  • Multi-Asset: Each of our multi-asset class benchmarks fell, with risk parity strategies modestly outperforming 60/40 strategies due to their greater bond exposure. Globally diversified portfolios experienced slightly smaller losses than US-centric portfolios.

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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 Asian-Pacific and developed market equity (1.81%), the spread between US consumer staples equity and the market (1.78%), and gold futures (1.44%)
  • Laggards: short short-dated VIX futures (-3.60%), the spread between US aggregate bonds and US Treasuries (-2.23%), and the spread between US investment grade bonds and Treasury bonds (-2.19%)
  • Commodity: Our alternative commodity betas split, with trend following and single-contract momentum strategies falling and term structure and sector momentum factors rising. Our short-term sector momentum factor was the best performer, adding 0.95%.
  • Credit: Credit factors fell almost universally, with underperformance generally increasing with duration and riskiness.
  • Equity: Value factors declined globally, but size factors split by region, struggling in the US and rising in foreign developed markets. Our US single-stock size and value factors lost 0.80% and 0.54%, respectively. Index-level size and value factors performed even worse. Momentum and trend following strategies were mostly losers.
  • Fixed Income: Term structure strategies performed well, with our 10-year/1-year spread factors gaining 1.03% in the US and 0.92% in Europe. Inflation-linked securities lagged nominal bonds in the US after adjusting for duration, trailing by 0.05% at the 10-year maturity.
  • Foreign Exchange: Our currency carry factor slipped 1.24%, but our other alternative betas produced modest gains. Momentum and value added 0.15% and 0.06%, respectively.
  • Multi-Asset: Our multi-asset class trend following and momentum factors all fell, losing between 0.53% and 1.88%. Medium-term momentum was the worst performer.
  • Real Estate: Real estate securities modestly outperformed small cap equities in the US but lagged by 0.16% abroad.
  • Risk: Almost all of our short volatility and variance factors fell, paced by our short VIX futures strategy’s 3.60% loss.
  • Momentum: Most trend following and momentum factors declined, both within and across asset classes.

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July 2017 Projection Review

  • Most of the indexes underlying our composite indexes have reported July returns, but our analysis is still preliminary and subject to change
  • We now estimate that hedge funds returned 1.05% in July, 0.11% less than our initial projection of 1.16%
  • As of this moment, we correctly predicted the direction of all 30 strategies
  • We were within 25 basis points for 21 indexes and within 50 basis points for 26
  • Both our hit rate and our accuracy were above average
  • 14 strategies performed better than we anticipated; 15 performed worse
  • Most accurate: Distressed Securities (exact), Equity Value (within 1 basis point), and Merger Arbitrage (within 4 bps)
  • Least accurate: Latin America (1.40% better than expected), Special Situations (0.95% better), and Technology (0.55% better)
  • Overall, our projections were 95% more accurate than naive forecasts

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