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State of the Industry: October 2018

Matt Giordano Vice President, Client Analytics

October was one of the rougher months for global markets in recent memory, with substantial volatility.

October was one of the rougher months for global markets in recent memory, with substantial volatility—relative to what we’ve become used to over the past few years—and a downward trajectory.

The Novus Hedge Fund Universe (HFU) lagged the US markets, returning -7.61% in October against the S&P’s -6.84%. All four of the Novus factor indices took a hit as well, led by the Concentration Index. Interestingly, despite the accelerated fall toward Earth this month, Concentration still far outpaces the other indices for 2018. Our flagship Conviction Index, down ~9%, still slightly leads the S&P YTD (3.81% vs. 3.03%).

Looking sector by sector, it’s clear that the industry’s attraction to IT and Discretionary names hurt relative returns over the course of the year, with alpha detractions of 4.62% and 6.34% YTD, respectively.  In October, however, the industry heavily outperformed the market in Discretionary names, reducing the YTD gap by 3.57%.

We noticed a bit of an off-trend moment in October when examining the best performing funds (public data disclaimers abound here). Two of these five funds report more than $1bln in market value (Glazer and Trian); usually we don’t see more than one breach that threshold.  Despite this deviation, the metric supports the theory that smaller, nimbler managers perform better in today’s markets.

Let’s close with a look at changes in dispersion and correlation.

Perhaps unsurprisingly, correlations rose significantly in October. Dispersion remained range-bound. It’s a mixed bag for stock-pickers at a high level, as the higher correlation could produce mispricing opportunities—that would depend on the time horizon, however, as continued market volatility might not see those theses play out in rapid time. Stay tuned.

 

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