NOVUS

RESEARCH

TM

> January 2014 A study of hedge fund holdings and drivers of return

Illustration by Mitch Blunt

Hedge Fund Holdings Review Q3 2013

By Stan Altshuller and Yuanjie Zhang

> Hedge Fund Holdings Review: Q3 2013 January 2014

TERMS

NOVUS RESEARCH

For decades, investment professionals have considered hedge fund managers the smart money on Wall Street. Over the long term, hedge funds have tended to outperform traditional benchmarks on a risk-adjusted basis, so their reputation seems justied. Still, until recently, assessment of hedge fund trading in specic sectors and securities has been limited to a few select managers at a time, and less has been done to gauge the growing industrys direction as a whole.

Recent advances in data collection and analytics coupled with deeper global public disclosure requirements allow for more robust study and close monitoring of hedge fund managers positioning. In this publication, we track developing trends in hedge fund equity holdings. In addition, we analyze the most popular and highest-concentrated names in hedge funds and relate this to out-performance of the broader market as well as study the biggest drivers of returns for the industry.

Background on Data
Governments around the globe require institutional and individual investors to le and disclose certain holding information for varying purposes. In the U.S., the SEC requires nancial institutions to le Forms 13F, 13G and 13D. The Japanese 5% Shareholders ling requirement is similar to the 13G ling. Like American 10k, 20F and proxy lings, British Registers requirements reveal ownership positions. British insider lings include Forms 3, 4, 5 and 144, and the U.K.s Regulatory News Service (RNS) publishes insider holding information. Similar disclosure rules also exist in other major nancial markets and provide public holdings information. Novus has aggregated, normalized and analyzed data from all of the aforementioned sources and many more to build the Novus Global Holding Database. Furthermore, we have selected a highly representative group of hedge funds sourced from the Novus Database and constructed the Hedge Fund Portfolio (HFP), a non-investable portfolio available to clients for closer analysis via the Novus Platform. This portfolio is the basis for our study. The indices we discuss later in the study are subsets of HFP and are also non-investable. For the purposes of this study, we limited our analysis to just the public long global equity positions disclosed by managers in HFP as well as those that most drove performance for the third quarter of 2013. The reasoning for trades that we outline here is conjecture and based exclusively on public information.

Security: An investable instrument from a single issuer. This may also be referred to as a name, stock or company. A security is associated with a return that is independent of managers investment. Position: A capital allocation by a manager to a security. Each separate allocation is a unique position. Alpha: The excess return of a fund, strategy index or investment relative to the return of the benchmark over a certain period. Category: A criterion for classication. Examples include country, sector or market cap. Exposure: The sum of all market values in a specic category. Exposure can be expressed as a dollar amount or as a percentage of total portfolio value.

Institution: A management company with one or more long positions. Also referred to as a manager. Participation: The number of institutions disclosing long positions in a specic security. Trade: The expression of an investment thesis through one or more positions. Hedge fund interest: The number of shares of all disclosed long positions from the selected hedge fund group as percent of shares outstanding for a specic security. Reported asset value (RAV): The sum of market value of all disclosed long positions for a certain manager.

> Hedge Fund Holdings Review: Q3 2013 January 2014

NOVUS RESEARCH

PORTFOLIO (HFP) As of 9/30/2013 Managers Countries Securities Positions Total Market Value $ 782 65 11,230 99,695 1,515B Change from 7/01/2013 +3 +1 +272 +2,448 +99 B

Portfolio (HFP):

The portfolio contained 11,230 securities and 99,695 positions across 782 managers and spanned 65 countries as of 9/30/2013. The total reported asset value (RAV) of the portfolio was $1,515B, up $99B from last quarter. Hedge fund managers have increased their total long value, which currently measures close to pre-crisis levels. The Feds ongoing quantitative easing program and the general economic recovery boosted U.S. equity markets and contributed positively to hedge fund performance on the long side. Although hedge funds attracted large capital inows since the market bottomed out during the crisis (as evidenced by the increase in AUM adjusted for performance), long exposure has stayed far below the pre-crisis level. We observe a slight decline of long exposure since 2009, as hedge fund managers are cautious about the potential impact of Fed tapering exerting pressure on global asset prices, and are skittish about taking on more directional risk.

TOTAL LONG VALUE VS. LONG EXPOSURE

Value ($B) 1800 1600 1400 1200 1000 800 600 400 200 Value Exposure Exposure (%) 180 160 140 120 100 80 60 40 20

3/04

9/04

3/05

9/05

3/06

9/06

3/07

9/07

3/08

9/08

3/09

9/09

3/10

9/10

3/11

9/11

3/12

9/12

3/13

9/13

Note: Long exposure is the total reported asset value as a percentage of total hedge fund AUM. (AUM Source: Hedge Fund Research (HFR))

> Hedge Fund Holdings Review: Q3 2013 January 2014

NOVUS RESEARCH

Performance
HFP slightly underperformed the benchmark entering the fourth quarter of 2013, as it returned 6.1% through November 15 against 7.0% for the S&P 1500. Year to date, the portfolio was up 32.8% compared to 28.9% for an equivalent position on the S&P 1500. HFPs performance was highly correlated to the benchmark, with a monthly S&P 1500 Cumulative Return Annualized SD HFP Cumulative Return Annualized SD Cumulative Alpha Correlation Beta correlation of 0.98 and a beta of 1.07 over the last three years. Over the longer term, HFP has a beta greater than one and a higher annualized standard deviation. Though cumulative alpha compounded over the years justies the extra risk taken by HFP, the out-performance on a risk-adjusted basis has been reduced in the last three years. QTD 7.0% N/A 6.1% N/A -0.9% N/A N/A YTD 28.9% N/A 32.8% N/A 4.0% N/A N/A 3 Year 62.5% 12.6% 62.0% 14.4% -0.5% 0.98 1.07 Inception 100.8% 15.1% 138.1% 16.8% 37.4% 0.97 1.08

HFP VS. S&P 1500

Return % 160 140 120 100 80 60 40 20 0 -20 -40 3/04 9/04 3/05 9/05 3/06 9/06 3/07 9/07 3/08 9/08 3/09 9/09 3/10 9/10 3/11 9/11 3/12 9/12 3/13 9/13 Cumulative Alpha S&P 1500 HFP

Column F

HFP

S&P 1500

> Hedge Fund Holdings Review: Q3 2013 January 2014

NOVUS RESEARCH

Sector
Compared to the S&P 1500, hedge funds are overweight Consumer Discretionary (19.8% vs. 15.0%) and Financials sectors (14.5% vs. 12.1%). They are highly underweight Consumer Staples stocks relative to the broad market as measured by the S&P 1500 (6.2% vs. 10.9%). HFP was also overweight in Energy, Materials and Telecommunication Services but underweight in Healthcare, Industrials and Utilities. Relative to Q2, HFP added 0.15% of exposure to Healthcare and 0.24% to Information Technology, in addition to the increase in Consumer Discretionary. Last quarter, HFP reduced exposure by 0.67% in Financials and 0.3% in Telecommunication Services. HFP maintained stable allocations to most other sectors. Over the longer term, HFP has steadily increased its wager in Consumer Discretionary but avoided the bond-like Telecommunications and Utilities sectors since the nancial crisis. Driven by the broad market rally and security selection, all sectors of HFP have positive returns, and eight of ten sectors outperformed the benchmark in Q3 2013. The largest area for alpha was the Telecom sector, where the stocks in HFP outperformed the benchmark stocks by 10.1%. Telecom was the only losing sector for the benchmark in Q3, as Telecom lost 4.3% in the S&P 1500 but gained 5.8% in HFP. Information Technology was the best-performing sector, up 11%, surpassing the benchmark by 5%. Consumer Discretionary, the most overweight sector, was HFPs second-best performing sector, up 10.5% in Q3. Despite the signicant underweight in Consumer Staples, HFP beat the S&P 1500 through selection skills, returning 5.4% in Consumer Staples against 0.9% in the S&P 1500. Besides the four sectors mentioned above, HFP also contained securities that on average outperformed their benchmark securities in Financials, Healthcare, Energy and Utilities, contributing to HFPs sector out-performance.

Hedge EXPOSURE Fund Historical Sector Exposure HEDGE FUND HISTORICAL SECTOR

100% 90% 80% 70% 60% 50% 40% 30% 20% 10%

Utilities Telecommunication Services Materials Consumer Staples Industrials Energy Health Care Financials Information Technology Consumer Discretionary

HFP vs S&P 1500 Sector Exposure and Performance

3/04 9/04 3/05 9/05 3/06 9/06 3/07 9/07 3/08 9/08 3/09 9/09 3/10 9/10 3/11 9/11 3/12 9/12 3/13 9/13

HFP VS. S&P 1500 SECTOR EXPOSURE AND PERFORMANCE

20%
9/06 9/09 9/04 9/08 9/07 3/06 3/09 9/10 9/05 3/04 3/08 3/07 3/05 3/10

20%
9/13 9/12 3/13 3/12 9/11 3/11

15 10 5 0 -5

15 10 5

3/04 6/04 9/04 12/04 3/05 6/05 9/05 12/05 3/06 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 9/10 12/10 3/11 6/11 9/11 12/11 3/12 6/12 9/12 12/12 3/13 6/13 9/13
?52?

Information Technology Consumer Discretionary

Health Care Energy

Industrials Consumer Staples

Materials

Utilities

0 -5

Financials Exposure as of 9/30 HFP S&P 1500

Telecommunication Services

Performance for Q3 S&P 1500 HFP

> Hedge Fund Holdings Review: Q3 2013 January 2014

NOVUS RESEARCH

HFP VS. S&P 1500 MARKET CAP EXPOSURE AND PERFORMANCE

60% 50 40 30 20 10 0 -10 Exposure as of 9/30 S&P 1500 HFP Performance for Q3 S&P 1500 HFP Mega-Cap Large-Cap Mid-Cap Small-Cap Micro-Cap 60% 50 40 30 20 10 0 -10

HFP vs S&P 1500 Market Cap Exposure and Performance

Hedge Fund Historical Market Cap Exposure

HEDGE FUND HISTORICAL MARKET CAP EXPOSURE

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 3/04 3/05 3/06 9/05 3/07 3/08 9/07 3/09 3/10 9/10 3/11 9/11 3/12 9/12 3/13 9/13 Mega-Cap Large-Cap Mid-Cap Micro-Cap Small-Cap

9/04

9/06

9/08

9/09

Market Cap
Exposure as of 9/30 HFP S&P 1500

% OF TOTAL LONG EQUITY PORTFOLIO

100% 90 80 70 60 50 40 30 20 10 0 0
10 20 30 40 50

% of total long equity portfolio

HFP

Hedge funds favored mid-caps, the highest Performance for Q3 overweight sector about one-third of the book, HFP S&P at 1500 versus 13.6% for the index. HFP had another third of its assets allocated to large-cap stocks, in which the S&P 1500 had a similar allocation. HFP was also overweight in small-cap and micro-cap stocks. The clear underweight was mega-cap, which accounted for only 21% of HFPs portfolio but more than half of the benchmark. In Q3, all market caps of HFP outperformed their counterparts in the S&P 1500, driven by security selection and sizing. In the particular case of micro-cap stocks, HFP achieved 11% return while the benchmark lost 9%.

Since the market bottomed out after Q1 2009, HFP has boosted its exposure in the large-cap and mega-cap sectors above pre-crisis levels. While HFP continued to add large-cap and mega-cap names, it slashed its exposure sharply in smallcaps and micro-caps. Over the long term, as large hedge funds experience increased incentive to gather assets over small funds, fund managers are expected to seek more investment opportunities among large-cap and mid-cap companies given the limited opportunities in mega-caps and the diculty of investing large amounts of capital in small-cap and micro-cap names. Thus, HFP is expected to continue to increase its allocation in mid- and large-cap companies as the industry grows.

Concentration
Not surprisingly, hedge funds have distinctly more concentrated portfolios than the benchmark. The typical hedge fund has on average 58% of its long-equity assets invested in its top 10 positions compared with only 17% for the S&P 1500. To some extent, higher concentrations explain more volatile performance against the benchmark. Nonetheless, with solid security selection, hedge funds have generated and accumulated sizable alpha over the years.
70 80 90 100

S&P 1500

60

# of Positions

> Hedge Fund Holdings Review: Q3 2013 January 2014

NOVUS RESEARCH

Novus Strategy Indices

In order to determine whether following the investments of hedge fund managers could add value over the broad market, we constructed custom, non-investable strategy indices and tracked their Strategy Consensus Size Concentration Conviction S&P 1500 QTD Return 6.72% 7.96% -0.28% 5.68% 7.04% QTD alpha -0.32% 0.93% -7.32% -1.35% 0.00% Return since Mar. 2004 48.94% 125.87% 287.90% 230.88% 100.76%

performance against the S&P 1500. In the following section, we discuss some of the methodologies used to construct these strategies as well as their results.

Consensus
To gauge the most frequently held names in the industry, we constructed a list of 20 stocks with the Alpha -51.82% 25.11% 187.14% 130.12% 0% Annualized SD Correlation 16.31% 16.58% 23.57% 14.62% 15.14% 0.95 0.91 0.81 0.91 1.00 Beta 1.03 1.00 1.26 0.87 1.00

Consensus APPLE INC GOOGLE INC MICROSOFT CORP JOHNSON & JOHNSON JPMORGAN CHASE & CO AMERICAN INTERNATIONAL GROUP CITIGROUP INC EXXON MOBIL CORP QUALCOMM INC BANK OF AMERICA CORP GENERAL MOTORS CO PFIZER INC GENERAL ELECTRIC CO WELLS FARGO & CO PROCTER & GAMBLE CO CHEVRON CORP MERCK & CO INTL BUSINESS MACHINES CORP FACEBOOK INC CISCO SYSTEMS INC

Label 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Ticker AAPL GOOG MSFT JNJ JPM AIG C XOM QCOM BAC GM PFE GE WFC PG CVX MRK IBM FB CSCO

Manager Count 238 205 189 187 185 177 164 155 155 154 153 151 150 147 145 141 140 139 137 135

Change from 7/01 11 -16 9 23 1 -8 -9 7 -10 1 21 -14 1 6 0 3 -1 3 54 -14

Value ($B) 11.96 10.32 9.81 4.33 6.50 10.67 6.66 3.23 5.50 3.68 5.41 4.71 3.42 4.30 3.42 2.39 2.50 2.94 7.05 3.44

% of S.O. 2.69 3.47 3.49 1.74 3.34 14.77 4.51 0.85 4.65 2.32 8.95 2.46 1.40 1.93 1.55 1.02 1.78 1.44 5.57 2.73

% of ADV 195.31 641.13 547.99 569.08 680.98 2187.69 584.54 322.43 670.27 279.06 1114.40 612.80 423.28 579.07 621.32 391.88 443.54 438.43 201.97 430.44

QTD Return 10.8% 18.0% 13.7% 8.9% 6.9% 1.4% 3.9% 11.5% 7.2% 8.1% 7.8% 13.0% 13.9% 6.1% 13.1% -0.4% 1.0% -0.6% -2.4% -7.4%

YTD Return 1.1% 46.1% 44.8% 37.8% 28.3% 39.9% 27.5% 13.1% 18.4% 28.8% 34.5% 32.7% 32.7% 31.1% 28.9% 14.7% 20.7% -2.5% 84.1% 12.1%

> Hedge Fund Holdings Review: Q3 2013 January 2014

YTD Return 100% 19

NOVUS RESEARCH

70%

40%

6 7 17 20 16

3 4 11 14 5 10 9 8 1 1213 15

10% 0% 18

-20%

-50%

20%

10%

0% S&P 1500

10% Consensus

20%

30%

40% QTD Return

highest participation among all the selected hedge participation index on an equal-weighted basis fund managers. The two highest-owned stocks by to be rebalanced every quarter according to the number of holders continued to be Apple and Goomethodology of top participation. We tracked its gle, while Microsoft displaced American Internation- performance compared to an equivalent position al Group as the third most popular stock. There are in the S&P 1500 since inception. Historically, this 782 managers in the portfolio; thus we estimate that index lagged the performance of the broad market 30% of all hedge funds hold Apple. benchmark. Hence, it would not have been wise to Top Par ti cipa tio n vs. S&P 1500 To understand if participation (consensus) simply invest with the highest-consensus names of translates into good performance, we created a hedge fund managers. TOP CONSENSUS VS. S&P 1500
120% 100% 80% 60% 40% 20% 0% - 20% - 40% Consensus - 60% 3/04 9/04 3/05 9/05 3/06 9/06 3/07 9/07 3/08 9/08 3/09 9/09 3/10 9/10 3/11 Cumulative Alpha 9/11 3/12 9/12 3/13 9/13 S&P 1500

> Hedge Fund Holdings Review: Q3 2013 January 2014

NOVUS RESEARCH

Size
In the next test, we aimed to uncover a relationship between allocation size and performance. We constructed a list of 20 stocks with the largest aggregate holding value among the 782 Manager Count 238 177 205 189 9 117 65 93 95 137 164 185 104 88 155 153 87 60 60 122 Change from 7/01 11 -8 -16 9 0 10 0 10 7 54 -9 1 -3 -3 -10 21 1 -5 -10 -2 selected hedge fund managers. Apple, AIG and Google remained the top three by value, but Apple and Google swapped their positions from the previous quarter. Value ($B) 11.96 10.67 10.32 9.81 8.72 7.76 7.50 7.41 7.39 7.05 6.66 6.50 6.16 5.50 5.50 5.41 5.41 5.35 5.32 5.28 % of S.O. 3 15 3 3 93 5 22 10 14 6 5 3 4 16 5 9 9 39 54 4 % of ADV 195 2188 641 548 132750 44 6197 2017 1213 202 585 681 823 4075 670 1114 2018 4615 3029 706 QTD Return 10.8% 1.4% 18.0% 13.7% 43.9% 7.2% 2.7% 2.0% 12.7% -2.4% 3.9% 6.9% 18.1% 10.0% 7.2% 7.8% 2.8% -4.5% -8.7% 5.9% YTD Return 1.1% 39.9% 46.1% 44.8% 179.6% 28.3% 79.2% 52.8% 83.7% 84.1% 27.5% 28.3% 47.2% 59.8% 18.4% 34.5% 43.6% 68.8% -18.7% 34.3%

Size APPLE INC AMERICAN INTERNATIONAL GROUP GOOGLE INC MICROSOFT CORP ICAHN ENTERPRISES LP SPDR S&P 500 ETF TRUST VALEANT PHARMACEUTICALS INTL TWENTY-FIRST CENTURY FOX INC PRICELINE.COM INC FACEBOOK INC CITIGROUP INC JPMORGAN CHASE & CO AMAZON.COM INC THERMO FISHER SCIENTIFIC INC QUALCOMM INC GENERAL MOTORS CO TIME WARNER INC CHARTER COMMUNICATIONS INC EQUINIX INC VISA INC

Label 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Ticker AAPL AIG GOOG MSFT IEP SPY VRX FOXA PCLN FB C JPM AMZN TMO QCOM GM TWX CHTR EQIX V

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> Hedge Fund Holdings Review: Q3 2013 January 2014

YTD Return 200% 5

NOVUS RESEARCH

150%

100% 10 18 50% 8 17 20 16 11 12 6 15 1 19 14 4 3 13 7 9

0%

-50%

-100%

-20%

-10%

0%

10% S&P 1500

20% Size

30%

40%

50%

60% QTD Return

Though the value index slightly outperformed overall, it swung to under-performance twice throughout history and trailed HFP over time. Most TOP SIZE VS. S&P 1500
140% 120% 100% 80% 60% 40% 20% 0% -20% Size

Top Value vs. S&P 1500

of the alpha was generated from 2011 to today. Still, the top-20 value index might lose that lead and repeat previous reversals.

S&P 1500 Cumulative Alpha

-40% 3/04 9/04 3/05 9/05 3/06 9/06 3/07 9/07 3/08 9/08 3/09 9/09 3/10 9/10 3/11
Cumulative Alpha Top Value S&P 1500

9/11 3/12 9/12 3/13 9/13

11

> Hedge Fund Holdings Review: Q3 2013 January 2014

NOVUS RESEARCH

Concentration
Next, we examined stocks with the highest aggregate percentage of shares outstanding for each specic security among hedge funds (hedge fund interest). We set a threshold of 20 participating managers to avoid penny stocks, closely held Change from 7/01 -4 -5 1 0 21 -10 2 0 8 -2 -1 11 11 -4 0 -2 3 1 13 2 stocks or extremely illiquid stocks. Again, we created a top hedge fund interest index and tracked its performance against the S&P 1500. The results were astonishing: one dollar invested in this hedge fund interest index in 2004

Concentration CVR ENERGY INC NATIONSTAR MORTGAGE HOLDINGS SAREPTA THERAPEUTICS INC SPECTRUM BRANDS HOLDINGS INC MASONITE INTERNATIONAL CORP EQUINIX INC REPROS THERAPEUTICS INC LORAL SPACE & COMMUNICATIONS LEAP WIRELESS INTL INC SCORPIO TANKERS INC VISTEON CORP REALOGY HOLDINGS CORP VANDA PHARMACEUTICALS INC NAVISTAR INTERNATIONAL CORP LIONS GATE ENTERTAINMENT CP ITT EDUCATIONAL SERVICES INC LAMAR ADVERTISING CO -CL A SEARS HOMETOWN & OUTLET STR PANDORA MEDIA INC HARBINGER GROUP INC

Label 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Ticker CVI NSM SRPT SPB DOOR EQIX RPRX LORL LEAP STNG VC RLGY VNDA NAV LGF ESI LAMR SHOS P HRG

Manager Count 20 25 21 26 22 60 24 28 20 33 59 63 26 20 39 23 47 20 47 21

Value ($B) 2.82 4.16 1.20 2.47 0.82 5.32 0.32 1.07 0.63 0.63 1.81 2.97 0.16 1.34 2.16 0.32 1.91 0.31 1.82 0.87

% of S.O. 84.3 81.9 74.8 71.1 56.1 54.1 51.6 51.4 51.2 49.1 47.4 47.0 46.7 45.7 43.9 43.8 42.9 42.4 41.3 40.7

% of ADV 12868.7 9530.4 1331.0 18432.9 16383.6 3029.2 1801.2 43680.0 1866.0 6455.1 4419.5 2562.3 1770.0 3983.6 4600.4 2541.2 4108.8 6542.7 755.5 32531.8

QTD Return 0.4% -30.9% -69.6% -0.3% 0.3% -8.7% -43.6% 7.0% 2.2% 20.9% 0.9% 6.0% 33.2% 9.2% -2.4% 33.9% 8.2% -7.8% 25.6% 10.0%

YTD Return -0.6% 25.4% -44.3% 48.0% 48.7% -18.7% -4.1% 32.6% 142.7% 67.0% 41.8% 8.6% 294.2% 83.1% 108.7% 139.7% 31.3% -10.1% 243.8% 48.4%

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> Hedge Fund Holdings Review: Q3 2013 January 2014

YTD Return 300%

NOVUS RESEARCH

13

250%

19

200%

150% 15 100%

16

14 10

50% 2 7 6 3 -50%

45

11

20 8 17 12

0%

18

-100%

-80%

-60%

-40%

-20% S&P 1500

0% Concentration

20%

40%

60%

80% QTD Return

would return about four dollars today, while the saw out-sized drawdowns during market declines. same investment in the S&P 1500 would have The relatively low trading volume of these constitreturned only two dollars. Yet, while this index uent stocks also makes this strategy dicult to generated 200% alpha and is to date the best-per- follow for sizable capital and exposes investors to Top Hedge Fund Interest vs. S&P 1500 forming index, it is much more volatile overall and signicant liquidity risk. CONCENTRATION VS. S&P 1500 Ytd Return
350% 300% 250% 200% 150% 100% 50% 0% -50% 3/04 9/04 3/05 9/05 3/06 9/06 3/07 9/07 3/08 9/08 3/09 9/09 3/10 9/10 3/11 9/11 3/12 9/12 3/13 9/13
Cumulative Alpha Top Hedge Fund Interest
S&P 1500

Concentration Cumulative Alpha

S&P 1500

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> Hedge Fund Holdings Review: Q3 2013 January 2014

NOVUS RESEARCH

Conviction
Does hedge fund conviction play a role in the future performance of stocks? If a stock accounts for more than 5% of a managers portfolio, the stock is considered an investment with conviction. We constructed a list of 20 stocks with the highest number Manager Count 177 238 205 117 130 137 189 65 93 90 95 153 109 75 59 105 56 60 55 118 Change from 7/01 Conviction -8 11 -16 10 1 54 9 0 10 8 7 21 -5 5 19 8 3 -5 0 -5 33 19 16 15 15 13 11 10 10 10 9 8 8 8 8 8 7 7 7 7 of managers invested with conviction. Using the same weight allocation and re-balance frequency, we created an index based on the top conviction stocks. This index beat the benchmark by 130% since 2004. The conviction Value ($B) 10.67 11.96 10.32 7.76 3.28 7.05 9.81 7.50 7.41 5.18 7.39 5.41 3.69 3.22 3.30 3.90 2.59 5.35 2.73 3.40 % of S.O. 14.8% 2.7% 3.5% 5.3% 1.2% 5.6% 3.5% 21.6% 9.6% 19.5% 13.8% 8.9% 7.2% 12.3% 36.3% 4.8% 15.2% 38.5% 15.4% 3.2% % of ADV 21.88 1.95 6.41 0.44 8.73 2.02 5.48 61.97 20.17 26.89 12.13 11.14 13.45 16.80 9.31 8.81 10.53 46.15 33.10 7.19 QTD Return 1.4% 10.8% 18.0% 7.2% 2.5% -2.4% 13.7% 2.7% 2.0% 7.1% 12.7% 7.8% 5.7% 3.0% 0.2% 11.9% 0.3% -4.5% 2.4% 11.2% YTD Return 39.9% 1.1% 46.1% 28.3% 29.7% 84.1% 44.8% 79.2% 52.8% 57.4% 83.7% 34.5% 21.0% 82.6% 65.5% 53.7% 58.4% 68.8% 35.7% 90.3%

Position AMERICAN INTERNATIONAL GROUP APPLE INC GOOGLE INC SPDR S&P 500 ETF TRUST BERKSHIRE HATHAWAY FACEBOOK INC MICROSOFT CORP VALEANT PHARMACEUTICALS INTL TWENTY-FIRST CENTURY FOX INC HESS CORP PRICELINE.COM INC GENERAL MOTORS CO EXPRESS SCRIPTS HOLDING CO PIONEER NATURAL RESOURCES CO ONYX PHARMACEUTICALS INC MASTERCARD INC CHESAPEAKE ENERGY CORP CHARTER COMMUNICATIONS INC LIBERTY MEDIA CORP GILEAD SCIENCES INC

Label 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Ticker AIG AAPL GOOG SPY BRK.B FB MSFT VRX FOXA HES PCLN GM ESRX PXD ONXX MA CHK CHTR LMCA GILD

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> Hedge Fund Holdings Review: Q3 2013 January 2014

YTD Return 100% 20 6 80% 18 60% 15 17 9 1 19 5 13 4 12 10 16 7 40% 14 8 11

NOVUS RESEARCH

20%

2 0%

-20% -10%

-5%

0% S&P 1500

5% Conviction

10%

15%

20% QTD Return

index also generated signicant alpha smoothly and navigated itself well through the nancial crisis and other major market retracements. The constituents of the index are stable, and turnover is low. Thus, we believe this particular index is CONVICTION VS. S&P 1500
250% 200%

Top Conviction vs. S&P 1500

promising as a strategy and can generate substantial return on a risk-adjusted basis over a long investment horizon. The conviction list presents a good pool for stock screening for longer-term, stable out-performance.

Conviction 150% S&P 1500 100% 50% 0% -50% 3/04 9/04 3/05 9/05 3/06 9/06 3/07 9/07 3/08 9/08 3/09 9/09 3/10 9/10 3/11 9/11 3/12 9/12 3/13 9/13 Cumulative Alpha

Cumulative Alpha

Top Conviction

S&P 1500

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> Hedge Fund Holdings Review: Q3 2013 January 2014

NOVUS RESEARCH

Most Important Securities

Clearly, some securities played a more meaningful role for hedge funds this quarter than others. We focused on several criteria to determine the most important names in hedge funds.

Top Initiated and Top Sold

The largest net adds in HFP (factoring out exits and reductions) were General Motors (GM), Facebook

(FB) and News Corp (NWSA), with the rst two ranking high enough on manager participation to qualify as veritable hedge fund hotels. While News Corp was only held by 69 managers at 12% of shares outstanding, it was the third-highest newly initiated name behind Facebook. American International Group (AIG) saw a mass exodus, as 51 managers sold or reduced the stock on a net basis (factoring out adds and initiations). Qualcomm (QCOM) and Pzer (PFE) also saw signicant exits at 44 and 42 net, respectively.

Position NEWS CORP GENERAL MOTORS CO FACEBOOK INC WHITEWAVE FOODS CO (THE) XILINX INC AMERICAN INTERNATIONAL GROUP QUALCOMM INC PFIZER INC GOLDMAN SACHS GROUP INC GOOGLE INC

Ticker NWSA GM FB WWAV XLNX AIG QCOM PFE GS GOOG

Manager Count 69 153 137 43 59 177 165 165 115 221

Net 56 54 53 31 28 -51 -44 -42 -39 -35

Value ($B) 1.10 5.41 7.05 0.47 0.73 10.67 5.50 4.71 1.76 10.32

% of S.O. 11.82 8.95 5.57 13.55 5.34 14.77 4.65 2.46 2.24 3.47

% of ADV 951.55 1114.40 201.97 1262.99 495.22 2187.69 670.27 612.80 361.92 641.13

QTD Return 11% 8% -2% 8% -6% 1% 7% 13% 4% 18%

YTD Return 12% 34% 84% 39% 25% 40% 18% 33% 30% 46%

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Top Winners
The largest winner by contribution to HFP, Icahn Enterprises, is a closely held holding company. Other large winners were popular names with sizable allocations. The second-largest conQuarterly Contribution (bps) 25.3 12.3 8.9 8.5 7.4 6.2 5.7 5.0 4.0 3.7 tributor, Google, was held by 205 managers at quarters end, while Microsoft and Apple, the third- and fourth-largest winners, and were held by 189 and 238 managers, respectively. Change from 7/01 0 -16 9 11 -3 7 -1 5 -14 10

Position ICAHN ENTERPRISES LP GOOGLE INC MICROSOFT CORP APPLE INC AMAZON.COM INC PRICELINE.COM INC CANADIAN PACIFIC RAILWAY LTD DELTA AIR LINES INC PFIZER INC SPDR S&P 500 ETF TRUST
YTD Return 200%

Label 1 2 3 4 5 6 7 8 9 10

Ticker IEP GOOG MSFT AAPL AMZN PCLN CP DAL PFE SPY

QTD Return 43.9% 18.0% 13.7% 10.8% 18.1% 12.7% 21.2% 19.5% 13.0% 7.2%

YTD Return 179.6% 46.1% 44.8% 1.1% 47.2% 83.7% 48.3% 138.1% 32.7% 28.3%

Manager Count 9 205 189 238 104 95 44 90 151 117

Value ($B) 8.72 10.32 9.81 11.96 6.16 7.39 4.10 3.88 4.71 7.76

% of S.O. 93 3 3 3 4 14 19 19 2 5

% of ADV 132,750 641 548 195 823 1213 5,339 1,009 613 44

150%

100% 6

50% 10 4 9

5 2

0%

-50%

0%

5%

10%

15%

20% S&P 1500

25%

30% Top Winner

35%

40%

45%

50% QTD Return

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Top Losers
The two costliest names by P&L attribution, Nationstar Mortgage and Sarepta Therapeutics, were among the highest-concentrated hedge fund bets as measured by percent of shares outstanding held by funds. Except for some pharmaceutical stocks Quarterly Contribution Ticker (bps) NSM SRPT EQIX TSLA ARIA CSCO CHTR EBAY PCYC GCVRZ -8.5 -5.5 -3.1 -1.8 -1.7 -1.7 -1.6 -1.4 -1.3 -1.2 that tumbled because of negative news related to drug trials, the other top losers tended to be aected by lower-than-expected quarterly nancial results in Q3 and plunged from their recent highs.

Position NATIONSTAR MORTGAGE HOLDINGS SAREPTA THERAPEUTICS INC EQUINIX INC TESLA MOTORS INC ARIA PHARMACEUTICALS INC CISCO SYSTEMS INC CHARTER COMMUNICATIONS INC EBAY INC PHARMACYCLICS INC SANOFI
YTD Return 350% 300% 250% 200% 150%

Label 1 2 3 4 5 6 7 8 9 10

QTD Return -30.9% -69.6% -8.7% -30.0% -86.5% -7.4% -4.5% -5.7% -10.5% -69.3%

YTD Manager Return Count 25.4% -44.3% -18.7% 299.9% -87.0% 12.1% 68.8% 3.1% 114.2% -63.5% 25 21 60 38 25 135 60 108 39 35

Change from Value 7/01 ($B) -5 1 -10 1 -2 -14 -5 -13 1 -8 4.162 1.197 5.324 0.902 0.298 3.439 5.345 3.771 1.839 0.269

% of S.O. 81.88 74.80 54.11 3.83 8.76 2.73 38.54 5.16 17.88

% of ADV 9,530 1,331 3,029 45 616 430 4,615 717 2,051

0.20 34,707

9 100% 7 50% 0% -50% 5 -100% -100% -90% -80% -70% -60% -50% -40% S&P 1500 Top Loser -30% -20% -10% 0% QTD Return 2 10 1 3 6

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Holdings Spotlight
Facebook (NASDAQ:FB) Facebook was the second-largest initiation in Q3, a new position for 53 managers, and was held by 137 managers at quarter end. Facebook is the worlds largest social media company, with more than one billion monthly active users around the world. Facebook has successfully monetized its mobile inventory this year, beneting from the widespread use of smartphones and tablets. Mobile advertising revenue now accounts for approximately half of the total advertising revenue, as compared with an insignicant 10% in the same period in 2012. The rise of mobile advertising revenue brought over 50% higher top-line growth in 2013, while the introduction of video ads on Facebook and Instagram is expected to accelerate monetization and further boost growth. Nonetheless, in its Q3 conference call, the company remarked about some slowing of teenage user engagement and planned to hold o on increasing the load of advertisements in the network's news feed. The challenge for Facebook seems to be striking the right balance between its monetization pace and user engagement/experience. Driven by its strong performance in the mobile segment, the share price had a nice run and almost doubled year-to-date. Delta Air Lines (NYSE:DAL) Delta, up 138% year to date, was among the largest contributors of HFP in 2013 and was held by 90 managers at quarter end. Delta Air Lines is one of the largest U.S. airlines and comprises about 18% of the total domestic market. Recent industry consolidations, capacity cutbacks and tight cost controls are helping to put the U.S. airline industry on a ight path to recovery.Delta led the legacy carriers with a 138% year-to-date return. The company led for bankruptcy in 2005, emerged in 2007 and merged with Northwest Airlines in 2008. Since emerging from bankruptcy, Delta has focused on paying down debt and improving its operations. In 2013, the company bought an oil renery to control fuel costs, cut less-protable regional ights of 50-seat jets and retrot older airplanes instead of buying new aircraft. Helped by the tailwinds of higher air trac and lower fuel costs, Delta has generated around $2B in prots for the rst three quarters of 2013. Since May, Delta has started to pay back investors, launching regular dividend pay-outs and a stock buyback program. Due to its outstanding fundamental performance, Delta was added to the S&P 500 in September and was one of the largest quarter-to-date winners for hedge funds, among which David Tepper and George Soros beneted most, sitting on huge positions. Nationstar Mortgage Holdings (NYSE:NSM) NSM shares fell 31% quarter-to-date and was the largest negative contributor of HFP, though it was still up 25% year-to-date. Nationstar Mortgageis a non-bank residential mortgage origination and servicing company based in Delaware. Saddled with the regulatory reform of mortgage markets since the subprime crisis, banks are exiting the mortgage business in large numbers, primarily because of high operating costs and heightened litigation risks. Unregulated non-bank competitors are purchasing mortgage portfolios from these banks and are consequently growing at explosive rates. Nationstar has undergone signicant growth spurts after purchasing the majority of Bank of Americas servicing portfolio and partnering with KB Home (KBH) as its preferred mortgage lender. The historically low 30-year mortgage rate and improving housing market have also contributed signicantly to the increasing volumes of renancing and purchase mortgages so far this year. Still, mortgage applications have declined over the past four weeks, as mortgage rates rose amid speculation about when the Federal Reserve will pull back QE3. Meanwhile, Nationstar posted Q3 nancial results short of analysts forecasts and sharply slashed its earnings guidance for this year and 2014 because interest rates negatively impacted its volume and margins. Sarepta Therapeutics (NASDAQ:SPRT) SPRT shares plunged 44% quarter to date and was the second largest detractors of HFP. Sarepta Therapeutics is a biopharmaceutical company whose lead product candidate, Eteplirsen, a treatment for Duchenne muscular dystrophy (DMD), is in Phase II clinical trials. In November, the Food and Drug

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Administration (FDA) raised concerns about a recent promising study and considers a New Drug Application (NDA) ling as premature after a competing DMD drug failed in a Phase III trial. Sarepta's share price slipped more than 60% on the news and was the second-largest loser for hedge funds, especially hurting some healthcare specialists. On September 30, Sarepta still had $280 million cash, about half

its market capitalization. It could operate for three years without tapping external capital. Given strong support for Sarepta in the DMD community, the FDA will probably allow the start of a conrmatory Phase III trial in a large number of patients in the next two years. Such a trial should settle the debate and potentially generate $500 million in annual U.S. sales alone, if approved.

Managers
160 140 120 100 80 60 40 20 0 0 20 12 30 13 50 100 45 43

MANAGERS RAV DISTRIBUTION

Manager's RAV Distribution

145 125 112 101 71

93

12 200 500 1.000 2.000

5.000 15.000 30.000 50.000 70.000 RAV($MM)

RAV = Reported Asset Value

Among 782 managers reporting holding information as of 9/30/2013, 280 had their reported asset value (RAV) clustered from $200MM to $1B. As institutional investors prefer their alternative investments in large hedge funds versus smaller players, we expect RAV distribution to shift rightward.

Largest Changes in Managers Reported Asset Value

To screen for managers that experienced large shifts in reported asset values, we pulled the performance and holding information of managers with the highest increases and decreases in RAV compared to their previous reporting quarter (for those with at least $100MM RAV in the previous quarter).

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Multiple factors can lead to signicant changes in reported asset value. Hedge funds can receive investors funding and allocate the new capital

to existing and new investments. In contrast, hedge funds are also subject to redemptions that can force them to liquidate their holdings. Man-

TOP MANAGERS WITH HIGHEST INCREASE IN REPORTED ASSET VALUE Top 10 Position Size 14.43% 17.64% 69.62% 89.45% 97.23% 61.81% 75.26% 32.19% 65.14%

Institution ARROWPOINT ASSET MANAGEMENT, LLC** CATAPULT CAPITAL MANAGEMENT LLC COLUMBUS HILL CAPITAL MANAGEMENT, L.P. MARATHON ASSET MANAGEMENT, L.P. SAB CAPITAL ADVISORS, L.L.C. DAVIDSON KEMPNER CAPITAL MANAGEMENT, L.L.C. PERCEPTIVE ADVISORS, LLC QUANTITATIVE INVESTMENT MANAGEMENT LLC ANDOR CAPITAL MANAGEMENT, L.L.C.

RAV Growth 885.39% 236.98% 154.78% 126.47% 122.99% 111.07% 100.60% 97.78% 97.75%

RAV ($MM) 3,665 809 1,876 1,758 825 1,801 2,142 1,123 1,345

Security Count 323 234 39 40 13 127 111 526 34

Age (Year) 3 5 6 9 12 14 11 5 11

QTD Return* 5.11% 7.17% 9.75% 8.52% 6.41% 4.58% -29.75% 6.52% 3.03%

YTD Return* 25.43% 32.34% 42.39% 22.99% 16.04% 17.40% 16.72% 24.90% 37.54%

*QTD and YTD returns are not actual returns but simulated based on public holdings **Arrowpoint Asset Management is now a mutual fund business after buying Aster Investment Managements $2.9 billion in assets

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agers can adjust their long exposure, an allocation change between invested capital and cash, resulting in a signicant change in reported AUM. Managers outstanding performance and sizable

prot reinvestment can also grow their reported AUM. Or, in contrast, managers suering from bad investments can drop their reported AUM by equivalent losses.

TOP 10 MANAGERS WITH HIGHEST DECREASE IN REPORTED ASSET VALUE Top 10 Position Size 0.00% 0.00% 59.00% 35.17% 76.32% 99.77% 59.14% 58.94% 77.33% 77.23%

Institution HIGHSIDE CAPITAL MANAGEMENT, L.P. ** MANTICORE CAPITAL AB*** KARSCH CAPITAL MANAGEMENT, L.P. ALPHABET MANAGEMENT, LLC FORE RESEARCH & MANAGEMENT, LP ARTIS CAPITAL MANAGEMENT L.P. S SQUARED TECHNOLOGY, LLC BREVAN HOWARD ASSET MANAGEMENT, L.L.P. MARATHON PARTNERS ROBOTTI & COMPANY ADVISORS, LLC

RAV Growth -100.00% -100.00% -92.83% -69.23% -63.10% -61.03% -60.93% -60.83% -59.50% -59.47%

RAV ($MM) 84 673 1,596 47 79 232 169 169

Security Count 0 0 24 304 46 12 44 34 24 25

Age (Year) 9 12 11 4 8 9 14 7 9 11

QTD Return* 0.00% 0.00% 9.91% 8.99% 0.40% -5.97% -1.94% -0.13% 10.09% 10.06%

YTD Return* 22.92% 22.49% 31.10% 36.29% 10.97% -36.09% 41.94% -8.50% 36.00% 35.91%

*QTD and YTD returns are not actual returns but simulated based on public holdings **The fund is liquidated ***Manticore no longer les as a separate entity and now les as part of Contour Asset Management.

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Final Thoughts
As the Fed continues to support a loose-money and low-rate environment, the U.S. economic recovery is accelerating, and corporate earnings are poised to increase even further. With this earnings increase and multiple drift, U.S. stocks nd themselves in the middle of a secular bull market. In the absence of hedging, and with excellent selection skills, hedge funds have been able to fully capture upside and modestly outperform benchmarks on the long side. Still, despite the broad market rally, hedge fund managers are cautious in increasing their long exposure, as some are concerned that asset price levels are inated by prolonged quantitative easing. In Q3 2013, broad economic optimism boosted all industry sectors of HFP. Consumer Discretionary was the highest-contributing sector, driven by overweighting and outstanding security selection. Information Technology, Healthcare and Telecommunications were also sweet spots for HFP, tops among the eight sectors out of ten that outperformed the S&P 1500 in Q3. As investing in hedge funds becomes more institutionalized and hedge funds need to expand to break even, we come to see managers seek opportunities in larger market cap stocks and report higher asset values. The performance of indices of our top stocks against the benchmark shows divergent results. Interestingly, the top participation index lagged the benchmark consistently, while all other indices outperformed the benchmark since inception. Though the top value index outperformed the benchmark, its constituents dragged down the performance of HFP. The performance of the top interest index and the top conviction index greatly exceeded the S&P 1500, the latter with a much smaller drawdown and lower volatility. We will be closely watching the performance of these indices as the constituents change every quarter, and we will have stronger condence in the robustness of their performance in terms of persistence and predictive power.

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Methodology
For the purpose of this study, we combined all reported long equity positions into a market value-weighted portfolio Novus Hedge Fund Portfolio (HFP). Every disclosed long position known to Novus is included in the portfolio from the end of the quarter it was rst reported until the end of the quarter it was closed, or until it was superseded by subsequent disclosure by the same manager. The portfolio was rebalanced quarterly to reect any disclosure updates and priced monthly to calculate prot and loss (P&L) based on security price uctuations. The value of each position was calculated based on the reported number of shares for each security and that security price. Exposures were calculated by taking the sum of the market values in a given category and dividing that by the sum of all market values for the given date. For example, to calculate exposure to Industrials on 12/31, we obtained the sum of all market values for positions reported in the Industrials sector and divided it by the sum of all positions on that day. still long the latest reported value. If a manager was long a security on the ex-dividend date, we assume the manager bought additional shares of the underlying security to reinvest the dividend. In instances where this paper references short disclosure, such disclosure comes from short public disclosure in the Novus Global Holding Database but is not included in the Novus Hedge Fund Portfolio.

Limitations
There are known limitations to the holding data. Because most shortpositions are not required to be reported nor to be publicly disclosed, we leave out short positions for the purposes of this analysis. The lack of short side also limits the transparency of merger arbitrage trades or hedging trades. Disclosure is limited to equity and certain derivative instruments, so only a portion of managers long exposure may be available, which excludes the insight on synthetic positions through the use of some derivate contracts. The data only reveal holding changes on a quarterly basis, and intra-ling turnover is not captured. The timeliness of the disclosure ling causes a lag in our analysis. For example, the majority of the equity holdings reects 13-F lings of positions owned as of September 30, 2013, although most of these lings were not made public until mid-November 2013. Not all long positions need to be publicly disclosed, as certain thresholds apply. Only long positions that exceed 5% of outstanding ordinary and preferred shares of a company must be publicly disclosed in 13G/13D or under Japanese 5% Shareholders rule. Only managers with at least $100 million AUM have to le form 13-F. The long exposure calculated is not an exact absolute value but a relative statistic. The AUM of the selected hedge funds is estimated based on the total hedge funds AUM sourced from Hedge Fund Research (HFR).

Assumptions
This paper relies exclusively on publicly available data; we assume it is correct.All trade theses outlined are based on public sources, are hypothetical, and may not correspond to actual manager theses on any particular trade. We assume all positions led as of September 30 were initiated on September 30 to calculate P&L for the following holding period. The exact time the positions were initiated is not reported, so we assume trades took place at the end of the last trading day at quarter end. When a long position falls below the public reporting threshold or drops from subsequent disclosure documents, we consider it a fully covered position and remove it from the managers portfolio even though a manager might still be long the security. If a manager does not report a position as covered, we assume they are

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RESEARCH

TM

FOR MORE INFORMATION, CONTACT Stanley Altshuller Chief Research Ocer stan@novus.com Yuanjie Zhang Research Associate yzhang@novus.com

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