By Hedge Fund Insight staff
Expectations of hedge fund returns should be tempered by market background – what suits one manager will not suit another. Equity hedge managers have had a very good year in the United States and Japan, and a decent year elsewhere.
Equity hedge managers in developed markets have produced positive returns in all but two months this year, according to Eurekhedge index data. Using factor analysis investors in hedge funds can understand why those returns came about. Axioma produce some useful information in this area, as well as high quality inputs to risk management for hedge fund managers.
Factor analysis for developed markets over the last six months is shown in the graphic below.
The two losing months were June and August. In June (shaded box above) only medium term momentum was a significantly positive factor, but that was overwhelmed in hedge fund returns by the negative returns to volatility, short term momentum and size.
August was also a losing month for equity hedge funds, but to a lesser extent than June this year. In August the damage was done by the momentum strategies of equity hedge managers – both short term and medium term momentum were negative factors last month. And both the momentum factors have been negative factors to return over the week to September 9th, as shown in the Table below.
The S&P500 is up over 3% this month and two of the three factors that particularly hurt equity hedge returns in June (size and volatility) have been positive in the month to date. So it is rational to expect positive returns for the MTD from equity hedge funds in aggregate, though some managers with a short-term trading style might disappoint.