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State of the Industry: November 2016

Faryan Amir-Ghassemi Director of Analytics

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)

bloomberg

Source: Bloomberg

 

ihs

Source: IHS Markit

bloomberg-2

Source: Bloomberg

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.

dispersion-vs-correlation

Source: Novus

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).

hedge-fund-relative-sector

Source: Novus

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.

hedge-fund-factors

Source: Novus

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.

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