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Industry Analysis

State of the Industry: September 2019

AAPL and WFC rallied as markets reversed directions from August's slump. Hedge fund factors were down during an otherwise positive month for most markets.

Nathan Innis
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For the past 50 years, September has historically marked the worst month of the year for markets. In the 2019 edition, September could be described as “middling,” and turned out to generally be a soft reversal of August’s negative trajectory.

The S&P 500 returned 1.88% in September, just about balancing out August losses. Hegde funds returned 0.96%, which bring aggregate industry performance to 17.39% for the year, compared to the S&P’s 20.47%. Most other US indices returned similarly to the S&P in September. The only negative return we track was the Russell 2k Growth Index (-0.72%). The Russell 2k Value Index, on the other hand, had an exceptionally good month (5.15%), as did the international indices we track; MSCI World returned 2.38%, Euro Stoxx 50 returned 3.96%, and Nikkei 225 returned 5.74%.

In an unusual twist, our hedge fund factors all posted negative returns during September. Concentration had the worst month of the lot, largely due to a heavy tilt towards the healthcare sector, which experienced poor performance in September. Even our flagship Conviction Index dropped slightly, due to Communication Services names like FB, NFLX, and SE. If we zoom out for some perspective, Conviction is still leading the pack and outperforming the S&P by 1.2% for the year.

Typically, smaller managers have an easier time making it onto our top 5 scoreboard each month, and this held true in September. Only one of the five—MHR Fund Management—falls within the over-one-billion AUM bracket, while the other 4 are all in the low-hundred-million AUM range.

JP Morgan made the news in September when it adjusted its price target for AAPL, forecasting 1 million more iPhone sales than previously expected during Q3. They also raised their Q4 prediction by 3 million. It therefore came as no surprise that AAPL was the top alpha-generating stock for hedge funds in September.

Equity investors have reason for steady optimism going into Q4, despite the somewhat contradictory signals of late. One encouraging event was U.S. and Chinese deputy-level trade officials met in Washington, D.C. during September for their first in-person trade talks in nearly two months. This has been viewed as a key steppingstone for formal talks to take place in October, hopefully easing tensions between these two economic powerhouses.

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