About Basil: Founder of Novus which does analytics on managers and portfolios trying to disaggregate sources of edge/skill and quantify obliques risks such as crowding and liquidity.
- Early 2000s, Basil began studying underutilized data sets :
- Public filings (ie 13F, 13D etc) domestic and abroad
- Monthly exposure reports from managers
- Position level reports when available which provided full transparency
- “People hear with their amygdala”
- Amygdala is the emotional center of the brain. His analysis was perceived as a threat as opposed to being received with commensurate rationality. Often his analysis contradicted narratives or perceptions
- Initial Novus Products
- Individual Manager Report
- batting and slugging avg, long/short attribution, geographic/industry exposures
- Overlap Report
- Calculate overlap between candidate managers as well as the client allocator.
- Aggregate/Look Thru Report
- Analytics on an allocator’s entire portfolio of managers combined
- Individual Manager Report
- Novus Framework Product: aimed at distilling manager skill, positioning (based on private data on 1500 funds)
- Product aims to be “Moneyball for Allocators”
Moneyball for Allocators: Decomposing Manager Skill
Factors that depend on the broader market.
- Exposure Management: How does gross exposure variation influence return? On average detracts 200 bps/yr
- Manager’s variation in this aspect is not persistent; deviation from mean is mostly luck
- Capital Allocation: How does exposure to capital structures or sectors contribute to performance?
- This factor is also typically negative for most managers
More persistent and where the potential for alpha lies
- Security selection: items picked out of the sectors or geographies
- Sizing: This is compared to a control of equal-weighted portfolio
- Trading: Tactical trading seen in flipping positions
Using the Framework to Make Better Allocation Decisions
- If the allocation thesis for any fund is simply returns it will invariably hit a bad run. Mapping a fund’s skill to the environment is a better basis to decide whether to cut or increase exposure to the fund than simply returns.
- For example, if the majority of a fund’s monthly alpha comes from trading but the data shows that the volume in the fund’s positions has been steadily dropping, it may indicate a lack of opportunity to capitalize on the fund’s strength.
- The framework allows an allocator to evaluate a fund based on its stated intentions. If they claim they have an edge in security selection they can be rated on that dimension.
- This shifts the evaluation from “thinking in T to thinking in N”.
- It doesn’t make sense to compare a fundamental value strategy vs a high-frequency strategy at the same time horizons.
- Large sample size of trades without any single trades dominating the results is easier to evaluate than strategies that make a few concentrated bets.
- Benefit of increasing transparency also accrues to good managers since the story is about more than returns and the data can reveal that a bad run is just bad luck (ie losses coming from extrinsic non-persistent factors)
4 Measures of Crowding
- Conviction: largest position sizes amongst managers; names reported as > 5% positions within a fund
- Best performing factor over time
- From Faber’s interview with fellow Novus co-founder Altshuller, they constructed a ‘Conviction Index’ with Barclays based on impressive and still persistent performance of stocks which rank high on a sort of high conviction positions by hedge funds (stock > 7.5% of portfolio concentration)
- Concentration: How tightly held are the shares?
- This is also a positive factor
- Consensus: how popular is the name?
- This factor underperforms over time
- Crowdedness: How consensus is the name AND how much daily volume do they represent? “How crowded is the theater; how big is the exit?”
- This is actually a factor which performs well over time but has massive skew
Scaling up as AUM Grows
How you can expect AUM growth to impact manager performance?
- Increasing number of positions
- If the manager has skill in sizing positions this will ‘flatten’ the alpha
- Moving into higher market cap names
- If the manager has skill in small cap, this is style drift
- Increasing current position sizes
- This deteriorates liquidity; while adding it can be a positive feedback loop but this is a double-edged sword. This is the most dangerous form of scaling if liquidity is overestimated