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State of the Industry: May 2018

Matt Giordano Vice President, Client Analytics

Hedge funds performed as a levered S&P this month, up 3.15% since April. US indices were strong in May, the Nikkei and Euro Stoxx were down.

For the interactive version of this report, please head to our Novus State of the Industry report.

In a reversal from April, May was a good month for US indices (S&P up 2.41%) but not great for either the EU (Euro Stoxx 50 down 2.31%) or Japan (Nikkei down 1.18%). The Novus Hedge Fund Universe (HFU) performed as a levered S&P this month, up 3.15%.

This is a good sign for the HFU. Last month (April), hedge funds were directionally positive when the S&P was down. This month, it outperforms an up market. At the top level, these are the trends investors need to see from their diversifying portfolios.

Breaking this outperformance down by sector for May, there was high excess return to be found in many sectors (Health Care, Staples, Energy, Utilities) as well as a few underperforming sectors (Telecom, IT, Real Estate). Empirically, there was a bit more alpha variance sector by sector than usual.

Looking at the Novus factor indices, Concentration had an incredible month, up 10.64%. This now puts Concentration leading the flagship Conviction Index (up 4.83% in May) by more than 5% YTD (13.98% vs. 8.8%). Differentiated name selections like IMMR, GHDX, and BCEI drove the outsized month for Concentration.

As usual, when looking at individual managers, it’s the sub-$1 billion crowd leading the way. There was one exception, with active long-only manager Abdiel Capital having a great month, up 20.2% on $1.187 billion in public market value. The overall leader for the month goes to Broadwood, up 25.8%.

Lastly, a check on the stock-picking environment for funds as Q2 draws to a close. Dispersion and Correlation both ticked upwards this month, coming in at 16.1% and 18.6% respectively. If these metrics continue to provide a leading indicator, we could continue to see good performance from the industry in June.

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