By Stanley Altshuller, Co-Founder, Chief Research Officer, Novus
Over the past several weeks, Novus has been following the behavior of hedge funds stocks relative to the markets. We’ve identified some key trends in March and have continued monitoring these trends through mid-April. Based on our observations, we’d like to share some of our findings with you.
Background:
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
Divergence of factor performance
US equity markets had a strong year in 2013 driven by a low interest rate environment and continued QE by the Fed. Specifically, growth and momentum stocks have outpaced traditional and value stocks since mid-2013. Looking at Value and Momentum’s performance through the lens of Novus’ multi-factor model, Momentum has clearly outperformed Value from July of 2013 into March of 2014:
Increasing capital chasing similar strategies
Hedge Funds deploying capital to high growth and momentum stocks had, on average, performed better than their peers in 2012 and 2013. The Tiger Cubs are a representative group that has benefited from this trend in recent history. The aggregated portfolio of Tiger Cubs, discussed in our recent study “Like Tiger, Like Cub” (Source), has seen a significant growth in reported public assets and a corresponding deterioration of liquidity. In this case liquidity takes into account the aggregated holdings of Tiger Cubs. Deterioration refers to an increase in average daily volume of underlying security ownership.
What happened in March?
Mean Reversion
The market, as measured by the S&P 500 (with dividends reinvested), was up slightly in March. However, an inversion of growth and value factors was taking place behind the scenes. Starting in mid-March, Value has roared back and outperformed Momentum by a large margin, closing the gap generated since mid-2013(see factor chart below). Clearly, this mean reversion of factors has hurt some managers and forced them to give back a portion of their gains made in momentum stocks thus far.
What Really Happened To Hedge Funds in March 2014 by Harvest
