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Forecasting February's Hedge Fund Industry Performance

February may well become a month for the history books, not only was it the month which saw the beginning of global coronavirus spread, but it also saw the fastest equity market correction in history (i.e. a loss of at least 10%). The abrupt end of the seemingly non-stop bull market rally in recent months - and years - raises many questions on how the alternative investments industry will fare. This week, we’re attempting to forecast the industry returns using available daily data from MSR Indices; MSR specializes in a wide variety of factor-based indices.

We will be looking at 3 different levels: all hedge funds, CTAs, and long/short equity funds,  which are represented by their respective BarclayHedge index. To run our forecast, we follow 3 simple steps:

  1. Screen the MSR index set (more than 1,100 daily indices) to find the 10 most highly correlated to each of the benchmarks for the last year

  2. Build an equal weighted portfolio from each of the 3 sets of 10 factors we get, adjusted to match volatility of its respective benchmark

  3. Check February performance of the result.

It’s quite a simple and efficient process, as we have all the necessary tools and information in AlphaBot. The results below show the daily returns of 10 factor indices from 2019-01-01 to 2020-02-29 plus the equal weighted portfolio in bold blue shown in each chart:

Hedge Funds February Forecast: -0.36%


CTAs February Forecast: 0.60%


Equity Long/Short February Forecast: -0.77%


As with any prediction business, of course, there is a large degree of uncertainty, especially considering how unprecedented the current situation is (potentially rendering a historical correlations approach meaningless). So, we are actually curious if this simplified method works at all. If it does, it will be an interesting model to use, for sure, for forecasting a large universe of monthly hedge funds using a small set of daily factors. We will keep an eye on the official figures from BarclayHedge in the coming weeks.

Dmitri Alexeev is Founder and CEO of AlphaBot, a collaborative platform for alternative investment research.

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