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Hedge Funds, Security Analysis

State of the Industry: December 2017

Raheem Shahid Senior Associate, Client Analytics

In the latest version of Novus State of the Industry, we examine factor movements of December 2017, including best performing stocks & funds

For the interactive version of this report, please head to our Novus State of the Industry report. Beginning with this edition, we’ve added a few international equities and we’ve also started tracking YTD alpha.

The Novus Hedge Fund Universe (HFU) ended the year with another positive month; it was up 1.57% and outperformed the S&P 500 (up 1.11%). 2017 was a great year for equities-the HFU and S&P 500 both posted positive returns every single month. While the HFU (20.4%) couldn’t quite outperform the S&P 500 (20.5%), it remained neck and neck throughout the year.

Within the HFU, all sectors but Consumer Staples (-1.25%) and Telecommunication (-3.87%) generated positive alpha in December, reversing last month’s trend. Interestingly, the most buzzed sector in 2017-Information Technology-garnered absolute positive returns but actually generated negative alpha (-2.87%) year to date. This suggests that this sector’s hedge-fund-generated returns were driven by the market, or beta allocation. Real Estate (6.95%) and Telecommunication Services (6.58%), on the other hand, produced the highest alpha year to date.

Turning to individual names, Wells Fargo (7.04%), Freeport (3.67%) and BoA (3.6%) were the three biggest alpha generators, whereas Kraft (-6.7%) was the biggest detractor month to date.

Among the Novus Indices, all 4Cs ended the year with positive returns. Concentration led with 3.29% in December, yet year-to-date returns total only 6.9%, which is the lowest among the indices. Conviction and Consensus were the stars of 2017, generating cumulative returns of 39.3% and 32.1% respectively.

This performance resulted from names that not only generated positive returns but also outperformed their respective market and sector benchmarks. The Novus Conviction index produced security selection alpha of 848 bps (21% of the total return) whilst the Novus Consensus index produced security selection alpha of 400 bps (12% of the total return).

To learn more about the performance of the Novus 4C Indices in 2017, read our analysis.

In December, the favorable environment for equity managers caused by low correlation continued: Correlation with the Russell 3000 remained low at 6%.

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