Did Novus Platform Users Outperform Peers During Covid?
A deep dive into 13F filing data suggests that SEI Novus hedge fund clients outperformed their peers during the first year of the pandemic.
In February 2020, a stock market crash began that would include the three worst single-day point drops in U.S. history. On the two-year anniversary of the official start to the global pandemic (March 11, 2020) we'd like to spend a moment revisiting those early days of a worldwide anxiety, and explore how investors armed with data and analytics fared versus the rest.
Portfolio Intelligence: also an antidote for a hedge fund's pandemic woes?
In March of 2020 investors experienced severe portfolio dislocation and were forced to react to unprecedented market conditions—even as they, along with everyone else, figured out how to adapt the very way they worked. Data from the SEC reveals that hedge fund performance was more or less on par with the S&P 500, pretty much everything and everyone dropped double digits at the height of the March 2020 drawdown.
In the early days of Covid, we at SEI Novus were also busy adapting to remote work and attempting to carry on business-as-usual. And then we started to notice something strange: business was actually....great. We were blessed, in fact, to experience our best year in recent history in terms of business growth. This was humbling, especially as so many around the world were suffering. Perhaps the increased appetite for our services could be compared to when a plane enters bad weather—the ride gets bumpy and visibility is low—and it's at that moment a pilot truly relies upon and appreciates their navigational equipment.
As the pandemic progressed, we also noticed anecdotally that our clients seemed to be faring better than their peers, suggesting that perhaps a deep understanding of one's portfolio via analytics truly does make all the difference. We began wondering whether this outperformance could be demonstrated through the lens of public filings data (to which investors can subscribe via our Public Ownership database).
Our curiosity got the better of us.
An analysis by my colleague Don Ike revealed that as the world awaited vaccines to help combat the virus, and markets continued to roil, users of The Novus Platform truly possessed a secret weapon: the ability to dissect and analyze every aspect of their portfolio management process.
Note: The data used in this report spans March 31, 2020 to March 31, 2021 and has been sourced from publicly accessible records only. No private client data was used for this analysis. The research relies on the 13F regulatory form, which is reported to the SEC on a 45-day lag and cannot be considered comprehensive.
Multi-Dimensional Analysis Finds SEI Novus Clients Among Top Hedge Fund Managers
English Mathematician Karl Pearson said, “That which is measured improves. That which is measured and reported improves exponentially.” So let's measure.
Using our 13F Public Ownership database, we separated approximately 1,500 hedge fund managers—known as our “Hedge Fund Universe”—into eight distinct groups, defined by similarities across 45 different attributes (see Figure 1). These attributes included exposure to sectors, exposure to geographies, up / down capture to benchmarks, Sharpe ratios, security contribution, average position, and crowdedness scores. For details on the methodology, please see our Appendix.
After creating these eight peer groups for the Hedge Fund Universe, we took inventory of where SEI Novus clients landed across these groups (also using their publicly reported 13F filings). In general, SEI Novus clients typically found themselves in groups characterized by more desirable figures across the 45 attributes. We were also excited to discover that SEI Novus clients are twice as likely to be in the top group; i.e., the top performers between March 2020 and March 2021.
17% of the managers in the wider Hedge Fund Universe (tracked by SEI Novus) ended up in Group 2, which was the best performing group—defined by the highest median performance over the filings period March 31, 2020 to March 31, 2021. SEI Novus clients disproportionately belonged to this top preforming group at 35%.
The results of a Two Sample Z-Test shows that the likelihood of this occurring due to chance is less than .001% (read: statistically significant).
Security Selection Drove Outperformance and Alpha During COVID-19
While we were in the thick of it, the common wisdom was that performance during the period was driven by sector rotations; e.g., short travel and leisure, short brick and mortar retailers, long working-from-home stocks and so forth. Our analysis, on the other hand, revealed that good ‘ole stock selection is still what sets the winners apart, regardless of the sector.
Our study illustrated that the top performing group—of which SEI Novus Clients were disproportionately concentrated—showed up strongly when it came to active contribution (Figure 2), and specifically security contribution (Figure 3). This tells us that Group 2’s outperformance is heavily attributed to security selection, rather than market or sector. In SEI Novus’ parlance, active contribution is comprised of security selection + trading acumen, while passive contribution is made of market contribution + sector contributions. See more on the Novus Framework.
While select hedge funds in other groups may have had solid security contribution as well, these tended to more closely resemble lower performing funds across other metrics, such as win / loss or up capture, ultimately leading to their underperformance relative to Group 2.
Interestingly, the top performing group (Group 2) did not have the highest median market contribution during that same time frame. The median sector contribution of the group was the highest, however, while some of the other groups trailed closely behind.
Looking at all four charts, we see how stock selection—not good fortune—determined the winners during the pandemic.
Our takeaway? Don't be tricked into assuming performance during Covid was driven by sector rotation; stock selection still reigns supreme.
Quality Tools. Quality Results.
The first period of COVID-19 will go down in the history books not only with epidemiologists but also with economists. Initial hits swung by the COVID-19 pandemic were brutal, but the belief that “unprecedented times” came in limited editions carried us through.
The past two years have taught us that tumultuous market conditions are filled with opportunities to outperform. We're grateful to see our tools making a difference—especially during some of the toughest months in recent history.
If you're interested in learning how our clients use The Novus Platform to support continuous improvement, check out our case studies.