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Hedge Funds, Security Analysis

State of the Industry: March 2018

Raheem Shahid Analytics Associate

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

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

March was the second consecutive month to bear a loss after a 15-month consecutive winning streak. These losses have transpired despite leading business indicators showing signs of a strong economy.

The S&P 500 ended the month down -2.54% whereas the other major indices Euro Stoxx 50 and Nikkei 225 were down -2.08% and -2.13% respectively. The Hedge Fund Universe (HFU) posted a loss of -1.50% in March and -0.74% for the quarter. The S&P 500 outperformed the HFU in January, but the gap has closed over the last two months—with the HFU now outperforming by a narrow margin of 15 basis points YTD.

In contrast to February, when all 11 sectors were down, this month Energy (1.87%), Real Estate (3.89%), and Utilities (4.00%) contributed positive returns. In seven out of the eight sectors where the market posted negative returns in March, hedge funds were able to minimize losses and generate alpha. This resulted in a 1.04% outperformance by the hedge fund industry over the S&P last month.

Consumer Discretionary (2.44%) and Information Technology (3.51%) are the only two sectors posting positive numbers quarter-to-date. These two, however, actually detracted in March. When comparing against the S&P, Utilities names have generated the most alpha (2.20%) for the Hedge Fund Universe portfolio YTD.

The Novus Conviction Index continues to outperform all peers YTD, including not only its cousins of the Novus 4C Indices, but also major indices across the board. Although Conviction was down -3.72% for the month, QTD it is posting a positive finish of 2.89%—primarily driven by January gains. Since inception, the index has generated an annualized return of 12.69%. The Novus Concentration Index, which generally has underperformed the market since mid-2015, was the only other index amongst the Novus 4Cs to post a QTD positive return (0.97%).

Outperforming Indices March 208

Stepping over to managers now, QVT Financials and Caymus Asset Management came in on top for the month, posting 14.7% and 9.3% respectively. The strong outperformance from QVT Financials can be attributed to a single name, Myovant Sciences, which doubled in value and is one of the biggest positions in the portfolio.

The uptrend in correlation continues—from 17% in February to 18% in March. The overall environment remains favorable for market participants, as correlation is still relatively low compared to 2016’s peak level of 38%.

Correlation rising in 2018

 

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