Harvesting Hedge Fund Returns

In this post, we bring Barclays’ Quantitative Investment Strategies (QIS) Conference to you, with Dr. Andrea Gentilini’s (Novus Partners President) presentation on hedge fund replication. His main topic was how to use 13F public filings to gain access to the highest conviction hedge fund ideas.

The conference participants, predominantly institutional investors and capital allocators, were polled on their awareness of this topic, and many were familiar: 61% had either considered these types of strategies or understood the data’s potential.

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Participants were further asked if they thought rules-based indices could replicate the alpha generated by hedge funds. 96% believed that at least some hedge fund strategies were replicable.

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Next, participants learned three key steps toward implementing a strategy based on quarterly public regulatory filings by Institutional Investors for U.S. listed stocks. Since thousands of investment managers—using a multitude of different strategies—file positions to regulators, a critical first move is narrowing the investor universe down to hedge funds with a fundamental equity strategy (the “stock-pickers”). This is where the best stock selection skills have historically been exhibited. Second, concentrate on these hedge funds’ highest conviction ideas by isolating the largest filed positions. Finally, it’s imperative to use high quality data on both who was filing and what was filed to ensure the strategy’s stock selections are based on reliable data.

With these elements in mind, Barclays and Novus codesigned a newly launched family of public data indices compiling the best ideas from fundamental equity hedge funds in the U.S.-listed large- and mid-cap equity space.

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Outlook

Although participants felt the outlook for hedge fund alpha wasn’t great—with only 27% reporting the outlook for hedge fund alpha as “good” or “very good” in the next twelve months—the Novus Barclays indices are performing well, given a good market environment for fundamental equity hedge funds in 2017.

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Takeaways

More investors are exploring the use of public filings to replicate hedge fund alpha. Novus’ decade of experience analyzing hedge fund portfolios led us to focus on hedge fund’s expression of idea conviction through position sizing. This is one of the crucial persistent hedge fund manager skills, and should be a major tenet of replication strategies. This focus, built on rigorous data validation and analysis of big public data sets, will lead to better outcomes when pursuing hedge fund replication.

For more detail on the Novus Barclays public data approach to harvesting hedge fund alpha, please visit: https://www.novus.com/data/barclays-data-partnership.

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