Hedge
Fund Monitor for 1-May-06 Hedge
fund returns up strongly this week o
Hedge funds returns recovered strongly for the week. The Div Hedge Fund Index
was up 0.52% last week (4.77% YTD) with 8 of 9 strategies posting positive
returns. o
European hedge funds had a solid March. The EuroHedge Index was up 1.40% in
March (4.80% YTD) as all strategies posted positive returns. Bullish
readings on equities, metals and energy o
Notable Large Speculator positions in the futures markets: Equity
Index Futures: HFs sold equity futures across the board in the S&P 500, NASDAQ
100 and Russell 2000 but action was relatively light. The heaviest action was
in the Russell 2000 as they sold their net long positions down to flat. Equities
have more room to rally as the small cap leadership held the uptrend line but
no longer face the headwind of a Large Speculator crowded long. Metals:
Readings look bullish for the metals. Large Speculators net long positions
in gold were steady but not excessive and silver positions look washed out.
Large Speculators are still not in copper as it rallied again to new highs. Energy:
Large Specs bought energy across the board as Oil continued to rally. Buying
momentum with relatively neutral readings can take the energy complex higher. Forex:
Large Speculators sold US$ and bought Euros and Yen as the Euro and Yen rallied
through important resistance. We expect further US$ weakness. Interest
Rates: HFs sold interest rate instruments across the curve. They remain
extremely short T-Bonds and sold their crowded long 10-year T-Note down to
net flat. Bonds are very oversold and could rally at any time. o
U.S. equity market neutral funds continue to have positive market betas with
other exposures unchanged. Other tilts: Value, Small Cap, Low Quality and Inflation. o
U.S. long-short equity funds market exposure is steady at average levels. Other
tilts: Value, Small Cap, Low Quality and Inflation. Equity
Market Neutral Exposure Analysis
Significant
Estimated Factor Exposures for Equity Market Neutral Funds: o
Market exposure positive o
Value, Inflationary Expectation and Low Quality tilts Significant
Factor Exposure Changes since Last Week o
Small cap exposure now only very slight and being neutralized Long-Short
Equity Exposure Analysis Estimated
Factor Exposures for Long-Short Equity Funds: o
Market exposure average o
Value, Small Cap, Low Quality and Inflation No
Significant Factor Exposure Changes from Last Week Long-Short
equity funds have historically been net long the market, and therefore, we
have calibrated their returns to their average market exposure to better measure
the factor exposures. Hedge
Fund Factor Exposure Analysis To
approximate the exposure of a hedge fund composite to a factor, we calculate the
daily returns of the composite when the factor is positive and negative and then
compare the annualized returns under the two conditions. As
an example, the interpretation of the exposure of the Equity Market Neutral Hedge
Composite to the Market Direction factor is shown in the table below. We calculate
the annualized daily returns for one, three, and 12 months of the average fund
return on days when the S&P 500 is up and when the S&P 500 is down.
We then compare the spread between the two conditions as an indication of the
exposure to that factor. Factor
Definitions Market
direction is defined as the returns of the S&P 500 Index. When the S&P 500
is up for that day, the market is up and when the S&P 500 is down for that day,
the market is down. Style
is defined as the daily return spread between the Russell 1000 Value Index
and Russell 1000 Growth Index. When the spread is positive, the style is said
to be Value and when the spread is negative, the style is said to be Growth. Size
is defined as the daily return spread between the S&P 500 Index and the S&P
600 Small Cap Index. When the spread is positive, the market is said to favor
Large Cap and when the spread is negative, the market is said to favor Small
Cap. Quality
is defined as the daily return spread between the S&P 500 Index and the Philadelphia
Semiconductors Index. When the spread is positive, the market is said to favor
High Quality and when the spread is negative, the market is said to favor Low
Quality. This proxy for Quality/y does not fully reflect the returns to the
Quality factor as measured by ML Quantitative Strategy. The quality spreads,
as published by ML Quantitative Strategy Team, are available only on a monthly
basis. Instead, we use the return spread between the S&P 500 and the Philadelphia
Semiconductors Index, which has a monthly correlation coefficient of 0.70 with
the A+ versus C&D Quality Spread for the period June 1994- September 2004. Inflationary
expectations is defined as the daily return spread between the Philadelphia
Gold & Silver Index and the S&P 500 Bank Index. When the spread is
positive, the market is said to favor inflation and when the spread is negative,
the market is said to favor disinflation.
Long-Short
Equity Hedge Fund Exposure Analysis Long-short
equity hedge funds have a historical bias of being net long the equity market.
If we measure the simple factor exposure of the long/short equity fund indices
in the same way we measure the equity market neutral hedge composite, the long
market exposure effect would overwhelm all the other factor exposures and could
result in false readings. We opted to calibrate the returns of the long-short
equity fund indices to neutralize for their market exposure to better measure
their exposure to other factors. Limitations
of Hedge Fund Exposure Analysis o
Hedge fund indices may not be fully representative of hedge fund returns. Not
all hedge funds are in hedge fund indices. The number of funds in each strategy
sub-index is relatively small. Some reasons for this non-inclusion are funds
closed to investors that do not report their performance to public databases,
funds with poor returns that stop reporting performance, and successfully incubated
funds that enter databases with "instant" track records with a very
low level of historical assets. o
Most of the hedge fund indices are approximately equal weighted. An equal- weight
index has an equal weight for each of the components in the index. Although
such a weighting methodology may better measure the broad returns of the strategy,
it may not fully reflect the strategy's investable returns because of size
differential. For example, a $200 million fund will have the same weight in
an equal-weighted index as a $2 billion fund. Assuming that they both invest
in the same universe of securities, the $2 billion fund will naturally have
a greater market impact than the $200 million fund. o
This analytical technique measures the direction of exposure but not magnitude.
Scaling the level of exposure is problematic, as the level of volatility varies
from fund to fund. o
Some hedge fund strategies are inappropriate for this type of analysis. An
example would be statistical arbitrage, where the typical holding period is less
than a week. Such a strategy is not amenable to this form of analysis as the
strategy investment horizon is shorter than the analysis look-back periods. |