Cheyne, Novus Peel Back the Curtain on Fixed-Income Performance

The two firms have created a tool that will offer fixed-income managers the same tools equity managers use to measure performance.


Cheyne Capital Management, an alternative-investment firm that manages credit, real estate and equity strategies, is ready to go where few hedge fund managers these days dare to tread: using sophisticated data analytics to show investors exactly how its performance fared against a passive alternative.

To that end, Cheyne has formed a partnership with portfolio analytics provider Novus to build a platform for fixed income securities analytics that Novus will eventually sell to other investment managers and asset allocators. Stuart Fiertz, co-founder, president, and director of research for London-based Cheyne, says he was interested in forming a venture with Novus because he wants Cheyne to have a better command of factor investing — choosing securities with exposure to a specific characteristic, such as value or low volatility — in the credit markets, which academics are only in the early years of researching. He also wants to make sure he can demonstrate to clients the value that Cheyne, an active manager, adds above a passive alternative, but needs a system like Novus to do that.

“We as an industry have to be courageous about opening up our process. I want to know the answer to these questions before an asset allocator asks me,” Fiertz says.

Novus now uses data and analytics to help fund managers and institutional investors understand the specific skills and behaviors that are adding value to — and detracting from — their equity portfolios. Cheyne is initially piloting the work with Novus to expand that service to fixed income instruments.

Though passive investing isn’t as pervasive in fixed income as it is in the equity markets, it is a growing force.

Andrea Gentilini, head of Europe for Novus, says the firm is investing in technology and engineering resources so it can eventually offer a product that meets demands for more accurate and predictive fixed-income analytics.

Josh Jacobson, chief operating officer of equities at Cheyne, rejoined the firm in 2015 after working as a coach for portfolio managers and helping them understand the ways that their behavior was helping or hurting their portfolios. He says that according to what he learned from his experience as a portfolio coach, few managers are in the practice of distilling their investment decisions down to the granular level.

In March 2016 Cheyne and Novus piloted a project using data on 450 investment-grade bonds tracked by Cheyne’s analysts. The platform reports a portfolio manger’s batting average based on specific securities, not just the performance of the whole portfolio. The numbers were plugged into Novus’s platform, and the results were promising. Jacobson says the effort produced data that could lead to changed behaviors in fund managers.

For example, Jacobson says he often finds that portfolio managers exhibit many emotions — ranging from absolute panic to euphoria — when it comes to selling securities. As a result, there’s a lot more variance around managers’ sell disciplines because of cognitive biases, such as loss aversion, when the pain of losing money outweighs the highs of performance gains. The Novus software can illustrate these types of selling mistakes to managers, Jacobson says. Managers can then take fairly simple steps to fix the errors, such as setting a limit on the amount that they are willing to lose on a position or establishing a detailed game plan when a security is initially purchased.

Given the threat that passive poses to active managers, Fiertz is particularly interested in the analytics that Novus will provide to pension funds, endowments, and other institutional investors regarding their fixed-income investments.

“Managers need to demonstrate where they add value, so they can justify their fees. And then allocators can justify allocating to active management,” he says.