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Novus Monthly Industry Report, Security Analysis

State of the Industry: February 2018

Raheem Shahid Senior Associate, Client Analytics

In the latest edition of Novus' State of the Industry, we examine factor movements of Feb 2018, including best performing stocks & funds.

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

February 2018 got off to a rocky start. The VIX peaked at 116% (the highest daily percentage change recorded), and the Dow experienced the largest ever same-day point decline (1,175 points or 4.6%). Thanks, however, to the low U.S. unemployment rate and robust business activity indicators—along with other positive factors—the markets are slowly recovering from this drawdown.

The S&P 500 posted a month-end performance of -3.69%. The early month sell-off rippled through the global markets; Euro Stoxx 50 and Nikkei ended the month with -4.68% and -4.40% performance respectively. The Hedge Fund Universe (HFU)—which is predominantly U.S. exposures—posted a -3.76% return, dragging down the YTD performance down to +0.78%.

While all eleven sectors lost value within the Hedge Fund Universe, we saw some dispersion in the total returns, where Energy (-9.55%) was the biggest loser, and IT (-0.34%) had the lowest decline and therefore best performance. The alpha remains negative at -74 bps YTD and is spread across all sectors. It should be noted, however, that it’s too early in the year to determine the HFU’s direction, especially referenced against the S&P index.

Amongst the Novus 4Cs, Concentration (-0.95%) performed best, while Crowdedness (-4.39%) showed the most loss. The Crowdedness Index commonly underperforms during market turbulence; a prime example of this is during the Valeant sell-off in mid-2015. Despite being down -3.31% in February, the Conviction Index leads the charts amongst its cousin Novus 4C indices, the HFU, and the S&P index by a huge margin, with YTD performance at +6.86%.

February 2018 Hedge Fund Performance 1

Even in a month like this, some managers posted solid gains according to their latest 13Fs, which were filed mid-month, and simulated through February’s month-end. RA Capital, which has a reported long market value of 1.6B, posted the highest return at 12.3%, closely followed by Delta Partners at around 10.2%.

The Russell 3000 shows an uptick in correlation—from 9% in January to 17% in February—likely responding to the month’s volatility.

February 2018 Hedge Fund Performance 2

The overall environment should remain favorable for market participants, as correlations are still relatively low compared to 2016’s peak level of 38%.

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