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Hedge Funds, Security Analysis

State of the Industry: October 2017

Matt Giordano Senior Associate, Client Analytics

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

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

In October, Novus’ Hedge Fund Universe (HFU) had its first sizable market lag in some time. The HFU returned just 1.63% for the month, compared to the S&P’s 2.34%. This now brings total YTD alpha into solidly negative territory, at -0.45%. With the two indices dancing in lockstep for most of the year, this is the most noticeable break since May.

In contrast, the Novus Conviction Index has been dancing solo all year, and continued to do so in October. It rose 4.8% this month, bringing YTD performance to 36.8%. Only Consensus names are in the same ballpark, returning 26.9% YTD. Concentration names continue to be the real laggard of the group, rising only 3.8% YTD.

Within the industry as a whole, AMZN was the largest alpha generator, which is not surprising considering their earnings release toward the end of the month. AMZN added 7.27bps of security selection alpha and is the HFU’s thirteenth largest position. The HFU’s largest position, AAPL, was the fifth highest alpha contributor for the month, with 2.73bps of security selection alpha. Looking at YTD alpha contribution, Altaba (AABA, 22.17 bps) and Alibaba (BABA, 19.29 bps) have been the biggest contributors, with AMZN coming in third. However, WFC, AAPL, and KHC have all received comparatively larger capital allocations through the year.

Finally, a quick check into YTD fund performance and the environment in which these equity managers are operating.

For the first time in a few months, a larger fund entered the realm of the top 5 performing funds. This was Fortress, coming in at number 3 on the list.

One force that could be helping these top equity managers to succeed is low correlation in the Russell 3k. With Correlation dropping to around 4%, the stock-picking environment continues to be a good one for the managers playing that particular game.

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