We’re excited to announce that we’ve recently added Wolfe Research’s new US Broad Equity Model to the Omega Point platform. Our team has already taken a deep dive into the new model, which includes fundamental, technical, and alternative data factors, and it’s clear that it can be of significant value to any investor seeking to better explain systematic risk and return dispersion in the US markets.
Wolfe Research Hedge Fund Barometer Portfolio:
To model institutional investor flows, we use Wolfe Research’s hedge fund proxy portfolio constructed as follows:
The L/S book approximates hedge fund longs against their most likely shorts (names with highest short interest in the market).
Industry Positioning Largely Explains Active Performance
This portfolio outperformed the S&P 500 by over 5% in 2020 with returns largely coming from the portfolio’s active exposures to Industries (8.68%).
Digging in further, we see that active industry bets on Real Estate, Banks, Energy E&P, and Tech Hardware were the top Industry performance drivers.
From the Exposures section, we see that all of these performance gains came from underweights to these industries. We also see that these underweights did not dramatically change over the period, suggesting that hedge funds maintained their industry positioning after the March downturn.
Institutional Investors Were Long Volatility Heading into the Crisis
The two charts below show the active exposure and performance of hedge funds to Wolfe’s Volatility factor (vs the S&P500). We can see that funds were already positioned in higher volatility names going into the COVID downturn (which led to a 3% underperformance) , and reaped great rewards from the bear market rally in April, reversing their losses into a 8% positive swing in outperformance.
Contrary to what we may have thought going into the analysis, institutional investors were well positioned heading into COVID, didn’t stray far from their industry tilts, and took advantage of the April bear market rally.
US & Global Market Summary
US Market: 5/26/20 - 5/29/20
Factor Update: Axioma US Equity Risk Model (AXUS4-MH)
Please let us know if you’d like to see your portfolio through the enhanced lens of the Wolfe US Broad model, or if you’d like to better understand and manage your exposure to any of the factors that we’ve discussed.