How Hedge Fund Managers Can Analyze Portfolio Changes

“The only thing that is constant is change.” – Heraclitus

Why Tracking Portfolio Changes is Important

It’s interesting to view a manager’s portfolio as a snapshot in time to understand their current exposures. But looking at the changes from a prior period shows the manager’s actions and their convictions on a forward looking basis. Have they lost conviction in their largest long bet? Are they trimming their losing names? Or adding to their winners? Analysis of portfolio changes can answer these questions.

There are two factors constantly in play within actively managed portfolios: market forces and manager trades. Even if a manager does not trade, the markets will dislocate their portfolio to a point where the decision to NOT act becomes just as paramount as a trading decision. For instance, if a manager’s position in Amazon has doubled due to performance of the stock, does the manager now have double the conviction in the name given the increased exposure she now carries? This is even more pronounced on the short side where positions increase as they move against a manager. The decision not to cover a short that is rallying is a critical one.

This is why one of our product teams, headed by Adam Benenson, introduced a new tab on the Novus platform: “Changes”. The tab allows clients to analyze changes to any portfolio over any time period. This article will review the functionality using a hypothetical portfolio that resembles a real L/S Equity manager.

Changes Tab

The changes section is now present for all manager portfolios, under the Positions tab.

The date selectors allow you to customize the period to any range. The first two tables show the top 5 largest increased (and decreased) positions. We can see that Arris Group was the largest change in the portfolio in Q4 2015. The position increased by 1.63%, and it is now 73% larger than it was at the start of the period. We can see similar information for the top decreased positions in the next table, but by far the most interesting part of the analysis is the main chart.

This chart shows every security in the portfolio that was present on either of the selected dates. It compares two snapshots and focuses on the net resulting changes to the portfolio. So if the manager sold 20m shares and then bought 50m shares of the same stock, the result you will see is a purchase of 30m shares and the effect of any price movement in between the selected dates. Importantly, if the manager bought and entirely sold out of a position in between the selected dates, it will not be reflected in the analysis.

Looking at the general shape of this chart can be very telling. For instance, many managers will have a concentrated long book and a diversified short book with many more positions that are smaller in size. In this (fake) portfolio we can see the opposite is true, the manager has more long positions (left) than short (on the right). But all their shorts are relatively small with the largest short position falling under 2% (Constellation Brands) while some long positions reach 6% (Alphabet). Hovering over each bar will provide more information on each position, while double clicking a bar will take you back to a trading history of that position.

Additional Functionality

The colors in the chart tell you which positions in the current portfolio are new (Darkest blue, EX: Abbvie short) and which have increased (Dark blue, EX: Arris long). These are overlays and can be toggled off by clicking on the legend for the corresponding data set. For instance, clicking off everything except Position Size will leave only the portfolio as it looks on the most current date in the range selected. The bright orange bars are exits – they represent positions that exited on the first date but are now out of the portfolio.

The table below the chart lets you arrange the data for further analysis. For instance, sorting on the % Change Quantity will show you the largest net trades the manager made for the period.

Looking at Arris, we can see that while the position is now 72.84% larger than it was in September, the quantity is only 46% larger. This means that the increase was driven by both a trade and performance of the stock relative to the rest of the book. As the price increased, the manager added to the position. However, with MTU Aero Engines, the manager decided to take some profits as the stock rallied.

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