Mergers have been frothy these past few, well, decades, yet alpha from the merger arb strategy remains elusive. Novus tracks 10 firms that invest in stocks of both parties to a merger, and only two of them have positive alpha over the past three years -- and frankly not positive by much. Lesson to be learned: Merger arb is really, really hard.

It's telling that Manikay Partners, leading the field with a whelming 459.22 annualized basis points, has been moribund since the start of the Covid-19 pandemic. Chesapeake Partners Management, the other marginal winner, shut down even before that.

That headline wouldn't be news in the pages of Bon Appetit, but represents an overlooked trend on Novus's Women-led Funds dashboard.

According to regulatory filings, these funds overwhelmingly limit their exposure to any one name to the 3.5%-5.0% range. Those positions account for 92.3% of their portfolios. Compare that to five and a half years ago, when that proportion was 36.5%. Back then, women-led funds preferred exposures in 5.0%-7.5% range, and a significant amount of positions accounted for more than 10% of portfolios.

NATHAN: RELATED DASHBOARD SHOULD BE SPECIALIZATION LEAGUE TABLES. COULDN'T FIND IT IN THE DROPDOWN.

Novus tracks six real estate-focused hedge funds in its specialization league tables, the largest of which is Long Pond Capital with $3.2 billion in AUM. And yet Long Pond is dead last -- by a mile -- in terms of annualized alpha. It's essentially giving away 346.77 basis points versus the market.

At the top of that league table is Waterfront Capital Partners, which improves 248.95 bps over the market. No single factor is going to explain why one firm is doing so well in comparison to the market while the other struggles, but we have to consider diversification as one of them. Waterfront's top 10 positions account for only 46.4% of its portfolio, while Long Pond's account for 62.1%

Everyone seems to have an opinion about Change Healthcare (Nasdaq:CHNG), and it's either, "Gimme more!" or "Take it off my hands!" There are few fence sitters in this debate.

According to the Novus Hedge Fund Ownership dashboard, Change attracted 34 new hedge fund owners in the last flight of 13-F filings, while nine others increased their holdings. And yet 20 sold off stakes while 25 exited altogether. Compared with the rest of the mid-cap universe, that's unique. So what gives?

More of a healthcare-focused SaaS provider than an actual turn-your-head-and-cough healing arts concern, its share price surged in the first week of this year and has since drifted down. Although its earnings are improving and Zack's recently put a Buy out on it, its January surge might have gotten a bit ahead of expectations. Its direction remains unclear, so forgive the hedge fund universe if it has partisans on both sides of the debate.

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There are three hedge funds -- Ecofin, Marvin & Palmer Associates and Cantillon Capital Management -- that outshine all others in terms of Environmental, Social and Governance metrics. All three seem to be more focused on Social although Ecofin extends that view into Governance.

But do they make any money along the way to saving the world?

Ecofin's exchange-traded fund (NYSE:TEAF) has kept pace with the broader market since the March 2020 shutdown. Marvin & Palmer, meantime, don't seem to have been zeroed in on ESG in particular, but the bets they made in semiconductors and banks seem to be paying off handsomely. Same can be said for Cantillon, which seems to be content to ride its stake in S&P Global (NYSE:SPGI) for all it's worth. Founder William von Mueffling had remarked a few years ago that his long-only strategy wasn't working anymore and that he'd have to try something else. We're unaware if he ever did state what his new game plan is, but ESG might be a good bet for him at this point.

Hedge funds appear to be more sanguine about the prospects of the Information Technology sector in Europe.

According to disclosure statements, there is significantly less short interest in techs now than there were in the trailing three months -- 15% versus 26%. It appears that Health Care and Consumer Staples are attracting more bearish attention. There is incrementally more short investment in Consumer Discretionary, which remains the sector with the most short interest.

Developed Europe accounts for 64% of shorted names and the United Kingdom for 34%. They are concentrated in the mid-cap and large cap spaces.

The premier Novus 4C index, Conviction, focuses on how much of their capital a fund manager is willing to bet on one stock. High-conviction stocks tend to be in Communication Services or Information Technology, including the best performers: Sea Ltd. (NYSE:SE), PayPal (Nasdaq:PYPL) and Alphabet (Nasdaq:GOOG).

Over the past two decades, the Novus Conviction Index has far exceeded U.S. and world stocks, and this outperformance is reflected in its reward-to-variability metrics. Regardless of how you measure risk-adjusted returns, Novus Conviction will impress with a Sharpe ratio of 0.40 compared to the MSCI World Index Fund's 0.27 and a gaudy Sortino ratio of 0.74 compared to MSCI's 0.41.

It's wise to keep a close eye on crowdedness -- a quality that companies exude when their shares are at once popular and illiquid. This is often where the hidden gems are.

According to the Novus 4C indices, three of these names have garnered particular attention in the hedge fund universe: West Fraser Timber (NYSE:WFG), Boliden (London:OYAL) and APi Group (NYSE:APG). A Canadian timber company, Swedish mining company and American construction company respectively, perhaps the most interesting thing about them is how boring they are. At the moment, the big money is betting on Information Technology, Health Care and Financials, but West Fraser and Boliden are in Materials while APi is in Industrials. Could this be a hint at where funds will flow when the inevitable rotation occurs?

There's a general perception that equity funds with a bias for long positions account for so much of the hedge fund universe because, well, it's the easiest to understand. It's a simple case of buy low/sell high. Be that as it may, it's also where a lot of the alpha is.

Late-stage VC investor Composite Capital Markets -- now Sea Capital following its acquisition in March -- dwarfed everyone else across all single-strategy funds with its ability to pick winners in the self-driving vehicle market. And while the rest of the long-equity pack lagged quite far behind -- 13,641.83 bps of alpha is quite a trick -- there were still a couple dozen  funds achieving 1,000+ bps over market using the same general strategy.

That said, shorts added more than just style points to equity funds. While the top long-short fund, Baker Street Capital Management managed to eke out a mere 10,827.86 bps of alpha, every single fund in that category tracked by Novus exceeded 1,400 bps over market.

An old saying, ascribed to the Iroquois, suggests considering the effects that any decision you make will have on the seventh generation to come. That's pretty much ESG investing's whole value prop. So it would appear that hedge managers can take the long view even when they're selling short.

The higher a company ranks on its ESG rating, the less likely it is to be shorted compared to the broader array of stocks. This is based on a comparison of the Novus Short Portfolio European index and the iShares Core MSCI Europe ETF. The discussion is confined to Europe because of short-interest disclosure requirements that are part of the regulatory framework there, but absent in most other markets. We'd be surprised, though, if the trend didn't hold worldwide.

While it's true that there are only a few hundred bears left in the wilds of Southern Europe, they do seem to be active at certain hedge funds.

The alpha bear right now is AQR Capital Management, which recently increased its exposure from -3.43% to -8.51%. Marshall Wace simultaneously moved from a net-positive to a net-negative position, while BlackRock and Citadel moved incrementally to the short side. AKO Capital and JPMorgan, though, seem to have come to similar conclusions about EU equities as has AQR.

By the way, don't worry too much about the literal rather than metaphoric bears. They still thrive throughout Scandanavia and the Baltics.

(This is the first in what is intended to be an irregular series about micro-cap stocks that have attracted hedge fund interest.)

While the hedge fund universe includes more than a thousand each of large- mid- and small-cap stocks, there are only 171 names on the micro-cap list. While some of these barely trade at all, some have rather excessive patterns as measured by the HFU's percentage of average daily volumes. For companies in which hedge funds own the largest proportion, this can be a stratospheric  number.

Take for example publisher Postmedia Network (OTC:PCDAF), two-thirds owned by Chatham Asset Management. The HFU's proportion of its ADV is 17.8 million percent. That's an order of magnitude higher than the 2.3 million percent of Indonesian insurer Asuransi MAG, controlled by Fairfax Financial. The HFU percentage of ADV is greater than 100,000% for five other micro-caps. The median figure for micro-caps is around 6,000% and for small caps around 2,000%.

Over the past year, hedge funds have been backing away -- slowly but inexorably -- from the Consumer Discretionary sector. Exposure stood at 14.73% of AUM at the end of 2020's third quarter and, as of the last round of 13F filings, has dipped to 13.60%. When one considers that the economy is growing rapidly after a year of bottled-up demand and consumer confidence keeps rising, this seems counterintuitive if not countercyclical. Do fund managers believe that our appetite for new cars and luxury goods will soon be sated? Have hotels reservations started tapering off already? Did we finish up all our holiday shopping over Prime Day?

And yet the rotation is clearly on. Financials, in the meantime, have risen from 10.81% of AUM to 11.96%. Bets are also being made in Energy and Materials.

The lyrics made famous by Harry Belafonte, The Grateful Dead and a whole slew of other recording artists are borne out by the Novus Women's Best Ideas index. In almost every quarter of the past five years, woman-led funds outperformed the Novus Hedge Fund Universe. While this is true in the aggregate, it's most starkly illustrated if we set aside passive contribution and consider only active contribution.

Woman-led funds tend to be more exposed to the Materials sector than hedge funds more broadly while less exposed to Information Technology. They're also more likely to favor mid- and small-cap stocks. When they do invest in mega-caps, they apparently do it more wisely than the boys' club; their mega-cap alpha contribution is 1,877 basis points compared to 1,120 for hedge fund stock pickers as a whole.

It was easy making money in New York in the first quarter -- all you had to do was park your dollars in an index fund and you'd be in for an 18% gain. Not so much in the rest of the world, and definitely not in the emerging markets.

Alpha is important in the developing nations. It may be elusive, but it can be found. Kora Management knows where it is, judging by its 5,272-basis point annualized stock-picking advantage. Gramercy Advisors and Think Investments were also in the zone, but then there's a significant drop-off. Then there's a really steep drop-off. Then there's a bunch of rows of minus signs.

The worst stock picker in the emerging markets, Asia Debt Management was almost as deeply negative in its alpha as Kora is positive. While the comparison between these two firms might not be fair -- ADM is a special situations play which intentionally invests in failing companies in the expectation of turning them around -- there's still enough range between the highest- and otherwise lowest-alpha ranking to make the point that not all hedge fund managers in this space are created equal.

It's hard to find a mega-cap stock which more hedge funds bought than sold in the first quarter. Such non-bank financial services firms as Berkshire-Hathaway (NYSE:BRK.B) are deflecting more hedge fund attention than they're attracting as many large banks, most notably JPMorgan Chase (NYSE:JPM) but a long list to follow, have passed their sell-by dates.

Tech giants also seem to be part of hedge funds' outward rotation, with Apple (Nasdaq:AAPL) sellers outnumbering buyers by more than two-to-one. Of the FAANGs, only Facebook (NYSE:FB) still held any allure as of the last round of 13F filings.

Other unloaded stocks include Disney (NYSE:DIS) and Johnson & Johnson (NYSE:JNJ).

Study after study shows that companies that focus on Environmental, Social and Governance criteria tend to outperform. Novus research bears that out, with top hedge funds holding a AAA rating on ESG metrics boasting a 39.00% return on invested capital compared to the 30.26% ROIC posted by BBB-rated funds.

But when you look at it in terms of alpha, it all evaporates. Security contribution is 58.10 basis points for AAA-rated funds, an order of magnitude less than the 687.69 bps for those rated BBB.

For those who wish to do well by doing good, perhaps the AA rating hits the spot. Its 33.50% ROIC pairs with a 244.44 bp security contribution.

Hedge fund managers are infatuated by the Communication Services sector, the Novus 4C Conviction index shows. We say "are infatuated by" rather than "love" because love stands the test of time and, as recently as May 2018, there was literally zero interest in the sector. But overnight it became the source of roughly one-third of hedge funds' exposure and has stuck to that plateau ever since.

Impressive results from such components as Sea Ltd. (NYSE:SE) and Alphabet (Nasdaq:GOOG) keep the relationship spicy.

Still, hedge fund managers have a wandering eye, and it might be casting its gaze at Financial Services next. Bank of America (NYSE:BAC) has garnered positive attention as read by the Consensus index.

It was hard to go broke betting against robotics developer Blue Prism (LSE:PRSM) this year, with its ski slope-shaped stock chart. With its persistent operating losses, it's no wonder that it accumulated so much short interest.

But May was the month those short positions got covered, and that was prescient. The company announced first-half results June 17, reporting increased revenues and a sharply narrower loss than in the last year's first six months.

Still, it looks like JPMorgan Asset Management UK might be left holding the bag. Last year, the firm had no short position to report against PRSM. At last read, though, they had run up a 4.29% exposure. Systemetica Investments also seems to have bet the wrong way, taking a 2.09% short position.

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(This is the first in what is intended to be an irregular series about micro-cap stocks that have attracted hedge fund interest.)

PowerFleet (Nasdaq:PWFL), which makes RFID devices to track delivery vans, loaded in truckloads of money from nine different hedge funds last month. The stock was a savvy investor's back door into the logistics industry, which skyrocketed during the pandemic lockdown. PWFL, though, struggled in April and was ripe pickings in May.

Meantime, eight hedge funds bought into Catalyst Biosciences (Nasdaq:CBIO), which develops hemophilia treatments. Maybe those fund managers know something the rest of us don't because, judging by CBIO's performance the past six months, this company should really be focused on anemia.

Let's start with what is not in contention: Michael Burry is a genius. He's a once-in-a-generation polymath. And yet, the subject of Michael Lewis's The Big Short hasn't been demonstrating that lately.

His Scion Asset Management fund has been underperforming the broader indexes for most of the past five years. Scion took an especially hard hit at the dawn of the pandemic in March 2020, starting in November, it looked to be catching up. And then, in April of this year, it looks like Burry's foot slipped off the gas pedal.

There's no one reason why Scion has begun to lag again, but here's one thought: It sold off all its stock in Pfizer (NYSE:PFE). And, while the case can be made that, not only is all the good news about the Covid-19 vaccine already in the stock, but there's real risk of government expropriation of the patent on the jab. Still, the broader market is sticking with Pfizer which, after a dip, is approaching a 20-year high.

Hedge fund managers' job is to find hidden gems, so forgive them for not doubling down on mega-caps the way the rest of the investment community is doing.

Companies with floats exceeding $50 billion still account for a 44.19% plurality of hedge fund holdings, according to the Novus Hedge Fund Universe, but that's nowhere near the S&P 1500's 70.21% majority. They are instead looking at mid-caps -- to the tune of 18.50% of holdings, compared to the broader market's 6.84% allocation.

Among mid-caps, Change Healthcare (Nasdaq:CHNG) and Anaplan (NYSE:PLAN) are attracting outsized hedge fund attention, based on percent of shares held, number of hedge fund holders, buys and new entrants.

Let’s start with, What is McPhy? It’s a French mid-cap – valued around $1 billion –tied to the hydrogen market. It’s a green energy play but, while such peers asBrookfield Renewable (Nasdaq:BEPC) or Atlantica Sustainable Infrastructure(NYSE:AY) are consensus Buys, short sellers are making bank on McPhy.

There’s no public news driving McPhy down – from $35 to $26 year-to-date – but there must be whispers. Strategic investors like Electricite de France (Euronext:EDF)and BPI France – a major private sector utility and public sector investment consortium respectively – together account for 20% of ownership, yet short interest is now 7x what it was January 1.

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Non-tech companies are just living in it.

For years, hedge funds have been rotating out of the Consumer Staples, Energy and Financials sectors, according to 13F filings, then parking that money inInformation Technology. The pace keeps accelerating, but it’s not the nuggets they’re buying, it’s the super-sized orders.

While funds increase their tech exposure, they’re also concentrating on mega-caps, which now comprise 43% of AUM. Apple and Microsoft by themselves account for10% of assets. Considering Apple is down year-to-date and Microsoft is barely keeping up with the S&P, these look like long-term fundamental bets rather than momentum plays.