Aggregated trends from recent 13F filings: hedge fund performance relative to the S&P, as well as key changes from previous fillings.
Recession fears have reared their ugly head, causing a jump in volatility and negative sentiment across risk assets. Bond yields continue to plummet and investors seem stuck between a hard place (record low yields) and…a hard place (a ten year bull market in equities). At Novus, we often look to hedge funds as an interesting signal of smart money sentiment. They have historically positioned themselves effectively heading into regime shifts.
As a quick recap, we produce an asset-weighted composite of every hedge funds’ public ownership data. This is called the Novus Hedge Fund Universe (HFU). This dataset was updated to reflect 13F filings collected from August 15th, 2019. That update gives us a view into how these funds have updated their aggregate positioning, as of the end of the 1st half of the year. It is an interesting exercise because at that time, fears of trade wars and economic slowdown were only beginning to creep into the public dialogue. What we see with hedge fund positioning is telling.
Performance Update – A “Health Check”
We’ll start by looking at the asset-weighted composite of security performance across all funds. Focusing just on long securities through the end of July, funds were beating markets by 25-50bps for the year. This contrasts with the first quarter of the year, where funds were closer to 150bps ahead of equity markets:
That 25-50 bps of outperformance can be tied to sector orientation and stock selection, two powerful frameworks for disaggregating excess performance. This asset-weighted composite of hedge fund positions is relatively similar to the market. After all, we are talking about $2.8 trillion of reported assets! There are, however, some notable tilts at the aggregate level. From a GICS sector standpoint, hedge funds were overweight discretionary, energy, and industrial securities, while being underweight info tech, staples, and health care.
Hedge funds also had different returns on investment as compared to the broader market through July. The most notable differences are in healthcare where they broadly outperformed, and in staples where they underperformed. Luckily, healthcare is a meaningful sector weight (~14% of the market and 13% of hedge fund long exposure) as compared to staples (7% and 6%, respectively):
Taking a step back, hedge funds marginally outperformed US equities (~50bps), of which the majority came from security selection. Almost all of it can be attributed to healthcare and discretionary stocks. Negative stock selection alpha can be attributed to staples. To briefly drill into drivers of stock selection alpha in healthcare, we can see the top ten contributors to the asset-weighted composite. As you can see, many of those drivers are biotech related, a subject we wrote about recently:
What were some of the key changes that funds made to their portfolios heading into this period of turbulence? For one, they trimmed TMT exposure, a favorite for many years. We saw sells across consumer, info tech, and communications sectors. The relative move on these sectors was a 100bps reduction in exposure. In their wake, funds increased exposure to industrials, healthcare and energy by approximately the same. That doesn’t sound like a lot, but remember, 100bps of this asset-weighted composite is about $28bn dollars!
What were some of the key names that saw this flow? Starting with our TMT basket, we saw meaningful shift away from hedge fund favorites, like MSFT (as we wrote about last week), LSXMK $1.4bn reduction), and BIDU ($1bn reduction). Funds largely reduced their holdings across 21st century Fox (both FOX/FOXA) a quarter after the merger (approximately $2bn reduction). Other notable reductions were DIS ($1.5bn reduction), AAPL ($1bn reduction), and ADSK ($1bn reduction).
To highlight one name in particular, funds dumped Cognizant Tech Solutions, a hedge fund favorite over the last 15 years. The stock had gone up nearly tenfold since the financial crisis, and hedge funds consistently owned over 15% of the shares outstanding. During the second quarter of this year, funds dropped their aggregate ownership of CTSH from 9.1% of shares to ~5.7%, a nearly 40% reduction. Unsurprisingly, the stock was quite volatile during the second quarter, beginning the period at ~$73/share and ending near $63/share.
In terms of hedge funds that added exposure to industrials, healthcare and energy names, a large portion of this fund flow can be attributed to merger arbitrageurs buying Anadarko Petroleum (approximately $6.3bn worth during the quarter), an announced acquisition by Occidental petroleum. This flow represents a 200% increase in aggregate ownership across hedge funds in the stock! Other majors adds across these three GICS sectors include Occidental, which drew activist interest ($3.6bn increase), and Uber Technologies, which is classified by Standard and Poors as an industrials stock. Hedge funds filed $5.7bn of exposure to Uber, which may represent bullishness, or simply the cross-over of private market stakes. Focusing on health care, funds added to Allergan ($2.5bn increase) and merger arbs poured into Array ($2.4bn increase). Of note, Humana drew nearly $1.5bn of flows during the quarter.
In a follow-on piece, we’ll dive deeper into hedge fund performance through the lens of the Novus 4Cs to provide a deeper understanding of the drivers underlying hedge fund performance.Published on August 23, 2019