November was a breathtaking month for markets, catalyzed by the US presidential election, a cloud around the Fed’s next move, and Europe’s future with the lurking Italy referendum. Major headlines tout how the “Trump” effect launched financials, industrials, and energy forward. These sectors had a knock-on effect to mid-caps (as seen by IWM’s spectacular move) due to mid-caps’ relative overweighting of financials. It’s also arguable that the speculation around policy change will be most beneficial to mid-caps.
Russell 2000 (2016)
Headlines claim that intra-sector dispersion has never been higher, which bodes well for stock pickers. While this is true, stock-specific analysis tells a different story. First, pair-wise stock correlations actually elevated, as sector rotations drove much of the rise in dispersion.
On the bright side, dispersion’s increase provided a breadth of opportunities for the “right trade” but significant underperformance for poor positioning. This will result in an increased skewness in performance on a fund-by-fund basis.
The right trade for hedge funds proved challenging, as they weren’t collectively positioned for the Trump effect (e.g., financials).
Interestingly, four of the top ten alpha-generative stocks in our HFU were healthcare names (HUM, CELG, SGEN, INCY) as micro factors outweighed the macro. Several funds benefitted tremendously from the violent post-election price action, including Fairholme (whose long-standing position in GSEs skyrocketed in November), Tontine (who hit a home run with their industrials position in IESC), and Firefly (whose positions in CMA and BAC warrants, alongside energy/industrial plays in MTW and NE, drove alpha).
Within our HF Factors, Conviction laid an egg compared to Concentration and Crowding, both of which outperformed the market.
Conviction’s heavy dose of tech compounders (“FANG”) are largely to blame; they’ve been market laggards post-Trump. Our Crowded Index continues outpacing the SPY for 2016 (+13.0% YTD), despite the media’s sentiment regarding crowded trades.
To access the Novus Monthly Industry Report, please click here.