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J.P. Morgan Asset Management Global Multi-Asset Group Factor Analysis of Massachusetts PRIM Hedge Funds. 2013. Overview. Performed factor analysis encompassing both traditional and alternative factors for each underlying hedge fund within the Massachusetts PRIM portfolio

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  1. J.P. Morgan Asset ManagementGlobal Multi-Asset Group Factor Analysis of Massachusetts PRIM Hedge Funds 2013

  2. Overview • Performed factor analysis encompassing both traditional and alternative factors for each underlying hedge fund within the Massachusetts PRIM portfolio • We seek to determine the level of alpha vs alternative beta delivered by the individual managers • We also examine whether there is evidence of factor timing • Two main types of analysis: • Rolling factor analysis attempts to test for evidence of factor timing in each hedge fund • Factor analysis for entire period attempts to see if there are consistent, significant exposures during the entire window studied (Given the short period studied, analysis of the entire period gives us more statistical rigor) • Assumptions: • Rolling window was set to 30 months of data

  3. Event-Driven Funds: Summary • Merger arbitrage premium is statistically significant in 5 of the 6 funds in both the single time period regression • As a group, event-driven hedge funds have the highest explanation of return variance by common alternative beta exposures • All funds analyzed could be decomposed into a combination of equity beta, alternative equity factors, convertible arbitrage, merger arbitrage, and credit spread factors • Highest potential for substitution with alternative beta factors; only two funds generate consistent, statistically significant alpha at the 90% confidence level

  4. Event-Driven Fund A

  5. Event-Driven Fund A: continued • The risk factors of momentum, merger arbitrage, convertible arbitrage, equity beta, and credit spread explain this particular event-driven fund’s performance very well • Rolling factor exposures remain consistent

  6. Event-Driven Fund B

  7. Event-Driven Fund B: continued • This particular event-driven fund is a standout as it generates statistically significant alpha • The strongest factor loading is to Credit Spread • Very strong, consistent performance post 2008 crisis

  8. Event-Driven Fund C

  9. Event-Driven Fund C: continued • A combination of merger arbitrage, convertible bond arbitrage, equity beta, and credit spread only can explain about half the variation in fund returns • Nonetheless, merger arbitrage loads very significantly throughout

  10. Event-Driven Fund D

  11. Event-Driven Fund D: continued • The risk factors of Momentum, Merger Arbitrage, Convertible Arbitrage, and Equity Beta explain a large portion of the variation in fund returns • Rolling factor exposures remain consistent; alpha term is statistically insignificant

  12. Event-Driven Fund E

  13. Event-Driven Fund E: continued • Event-Driven Fund E generates statistically significant alpha at the 90% confidence level • The small cap and equity beta factors can still explain half of the variation in fund returns

  14. Event-Driven Fund F

  15. Event-Driven Fund F: continued • Event-Driven Fund F can mostly be explained by the momentum, merger arbitrage, equity beta, and credit spread risk factors • Static exposures track actual fund performance very well throughout the entire history of the window

  16. Equity Long/Short Funds: Summary • As expected, all funds exhibit significant factor exposure to equity beta • Four of five funds (Funds B, C, D, E) load positively on global alternative equity factors • Three out of five funds (Funds A, B, D) also exhibit factor exposure to credit spread • Three of five funds (A, C, E) appear to exhibit positive alpha

  17. Equity Long/Short Fund A

  18. Equity Long/Short Fund A: continued

  19. Equity Long/Short Fund B

  20. Equity Long/Short Fund B: continued

  21. Equity Long/Short Fund C

  22. Equity Long/Short Fund C: continued

  23. Equity Long/Short Fund D

  24. Equity Long/Short Fund D: continued

  25. Equity Long/Short Fund E

  26. Equity Long/Short Fund E: continued

  27. Global Macro Funds: Summary • As a group, Global Macro has most amount of return variation not readily explained by our defined alternative beta factors

  28. Global Macro Fund A

  29. Global Macro Fund A: continued • Possible window size issue in rolling factor exposure analysis with backwards variable selection unable to find significant factor loading for the better part of 2012 • Generates large statistically significant alpha

  30. Global Macro Fund B

  31. Global Macro Fund B: continued • Static factor exposure shows significant loadings notably to Commodities and Duration with a Value tilt

  32. Global Macro Fund C

  33. Global Macro Fund C: continued • Persistent loading on Momentum, Commodities and Duration

  34. Credit Funds: Summary • Funds B, C, and D have statistically significant exposure to Value based Credit • Funds A and D generate substantial, statistically significant alpha

  35. Credit Fund A

  36. Credit Fund A: continued • All traditional factors do a poor job of explaining variation in fund performance • The only factor loads significantly is Global Value • Generates substantial, statistically significant alpha

  37. Credit Fund B

  38. Credit Fund B: continued • Statistically significant exposure to Credit Spread with a bias towards momentum • Substantial fund outperformance relative to static exposure post-crisis

  39. Credit Fund C

  40. Credit Fund C: continued • Credit Fund C is the most readily explainable credit fund by alternative beta; loads significantly on Value biased Credit Spread • Little evidence of alpha beyond these alternative beta terms

  41. Credit Fund D

  42. Credit Fund D: continued • While loading significantly on Global Value and Credit Spread, a large portion of variation in fund returns remains unexplained • Generates substantial, statistically significant alpha

  43. Market Neutral and Multi-Strategy Funds: Summary • Similar to Global Macro funds, a difficult group in generals to replicate using alternative beta because of the possibility of factor timing within the design of each fund • Multi-strategy Fund B has the best overall possibility of replication within this group

  44. Market Neutral Fund A

  45. Market Neutral Fund A: continued

  46. Multi-Strategy Fund A

  47. Multi-Strategy Fund A: continued

  48. Multi-Strategy Fund B

  49. Multi-Strategy Fund B: continued • Best overall replication in the group; consistent exposures to Momentum, Credit Spread, and Commodities with high regression r-squared for the entire period • Rolling factor analysis indicates fairly consistent exposures

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