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Decade in Review

As the decade wanes, we've compiled a few charts to commemorate how hedge funds have interacted with equity markets during the "teens."

Nathan Innis
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Happy New Year! As we head into the 20's, we pause for a moment to reflect on the last 10 years.

The Novus Hedge Fund Universe (HFU) is a proprietary portfolio that aggregates data from over 1500 underlying managers. We curate and track this portfolio as a reference for hedge fund performance. (Necessary disclaimer: 39 of the 40 quarters represented in this analysis are from 13F public filings. Q4 2019 will become available on February 15, after the normal 45-day lag. Therefore, the current quarter is based on simulated performance from the most recent filings.)

Highest Contributing Stock by Year

At a glance, it's easy to see that AAPL was the hedge fund darling of the decade. And what a decade it's been for Apple! They began with the release of iPad 1 in 2010, and AAPL became the world's first trillion-dollar company in 2018.

Figure 1 – Stocks with the largest contribution to HFU portfolio by year

Contribution, in this case, is the product of return multiplied by exposure of the position for the aggregate portfolio.

120 Months of Hedge Fund Returns

Returns are just the beginning of true analysis, but they at least make for an interesting visualization...

Figure 2 - Monthly returns of the HFU portfolio

Every major dip or spike in Fig. 2 hearkens back to an economic headline from the last 10 years.

For example, try to identify the best and worst returns of the decade using Fig. 2, and you'll notice they are actually consecutive months. In 2011, the stock market (and hedge fund returns) declined from May until September—September turned out to be the absolute worst month for hedge funds of the entire decade (Fig. 3b). This was of course driven by the European sovereign debt crisis, and concerns over the slow economic growth of the United States and its credit rating being downgraded. As promises were made that a deal would be reached, markets began to recover in October, resulting in the highest monthly return figure for the HFU of the decade (Fig. 3a).

Figures 3a, 3b - Best & worst months for Hedge Fund

5 Best/Worst Picks of the Decade

We'll use the Novus Framework to identify the best and worst stock picks. Through a proprietary methodology, the Novus Framework measures the value added by each degree of freedom used in a manager's process—market, sector, security, and trading. Below we've graphed positions from the HFU portfolio, based on the last 10 years of 13F filings, and color coded by degree of freedom. Security selection is the component we'll focus on to isolate stock picking skill.

Figure 4 - Novus Framework for the HFU, showing attribution of market, sector, and security selection for each position

The tables below are sorted by security selection alpha, which can be understood as an isolation of stock picking skill, achieved by excluding the effects of the market and sector. (13Fs do not provide insight on intra-period trading.)

Figure 5a – Best alpha stocks of the decade for hedge funds
Figure 5b – Worst alpha stocks of the decade for hedge funds

Where we might expect to see FAANG (Fig. 5a), we get FAAN...C? Notably, GOOGL did come in at seventh best, after MSFT and before FOX.

And remember how Wells Fargo was the top contributing stock in 2013 (Fig. 1)? Well, WFC also made the list of worst alpha stock picks (Fig. 5b) when you consider the entire period 2010-2019.

Sector & Market Cap

The Novus Framework can also be used to slice a portfolio by any category. Let's group the HFU constituents by sector, and apply the Novus Framework, isolating for security selection. We can see that when it comes to stock picking, hedge funds in aggregate appear most adept at picking names in the Communication Services sector.

Figure 6 – Isolating security selection alpha by sector

In Fig. 7, we run the same analysis for market cap. We can see that stock-picking success has a relatively proportionate relationship to market cap.

Figure 7 – Isolating security selection alpha by market cap

Interested in seeing your portfolio's Decade in Review using Novus tools? Hit "Request Demo" in the footer below.

The Novus 4Cs

We would be remiss not to check in with our proprietary indices, the Novus 4Cs, which track the most popular stocks among hedge funds. You can see from Fig. 8 why we celebrate the Novus Conviction Index as much as we do on this blog. Over the last decade, Conviction's stats are simply unrivaled; with an annualized return of 17.03% and a Sharpe ratio of 1.16.

Figure 8 – Performance & risk stats from the Novus 4C Indices

Let's also chart Conviction, Consensus, Crowdedness, and Concentration for the 10-year period.

Figure 9 – Novus 4C Indices ROIC

For more information on the 4Cs, you can read this introductory paper, check out our recent deep dive on Conviction vs. Consensus as it relates to "best ideas" strategies, or learn more about the investible version of the Conviction Index, offered through Barclays.

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