Novus Partners is one of the few firms that seems to do a more than credible deep dive into hedge fund analytics – risk management, investment themes, performance attribution, analyst compensation, client reporting, and marketing.

In Volume 1 of the Hedge Fund Survival Guide (get your copy here) Novus provided a 20-page practical field guide for hedge fund managers seeking to go forth, survive, and prosper.

Some key takeaways:

1. Hedge Funds Have in General Been Good at Timing Sectors

While past is of course not prologue, according to a report in the guide by Melina Sanchez, “Hedge funds generate excess returns by actively selecting sector exposure.” Since 2007, the guide said, hedge funds are good at betting on all sectors, on average, except for financials.”

2. Position Sizing Skill is Invaluable

How do the best funds tend to outperform? Not surprisingly, “Expressing conviction in your best ideas through sizing bets turns a good manager into a great manager and can pay dividends,” reported analyst Rahim Shahid.

Improper position sizing is one of the five most critical mistake managers often make in sourcing alpha, according to Novus. The others: messy market timing; poor stock selection in one select sector; overtrading on the short side; and a too-big to succeed illiquid allocations.

3. Analysts Are More Than Their P&L

Fund management compensation, should “Align the company’s goals with analyst compensation thanks to a thoughtful, agreed-upon system, said Stan Altshuller, Novus’ co-Founder.

Transparency is critical. “If absolute P&L generation is the goal,” said Mr. Altshuller, “Be clear about that and use facts to inform your compensation discussion. If it is more nuanced than that, having a robust portfolio intelligence system becomes critical in substantiating these difficult decisions and guiding the conversation at year-end.”

4. Hedge Fund Alpha in Small Caps is a Myth

“While intuition suggests that alpha should reside in smaller market cap stocks….alpha has been consistently concentrated in the mega and large cap names,” said Colleen White. According to Ms. White’s report analysis, micro cap names in the broad Novus hedge fund universe have not generated alpha:

Click here for Volume 2 of the Novus Hedge Fund Survival Guide.

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