Short-bias hedge funds: Masochists or Yeomen?
Jul 17th, 2007 | Filed under: Investment Management FeesFor the past 20 years, managing a short-bias or short-only hedge fund has been a little like one of the stunts performed by street magician and certified masochist David Blaine. Like Blaine, short-only fund managers have voluntarily put themselves in highly uncomfortable, cramped, painful situations in pursuit of their mysterious craft. The chart below showing the track record of the CS/Tremont Dedicated Short Index illustrates how the short-only crowd has endured the equivalent of being submerged in a tank of water, enclosed in a giant ice cube, suspended in a glass box, and forced to stand on a 75 ft. poll for a day and a half. And still, they soldier on.
As passers-by gawk at the spectacle, some have marveled at the display of resilience and determination while others have scoffed at these managers – as they often do at Blaine - saying things like, “What a loser. Why doesn’t he get a real job!”. But everyone wonders what could possibly motivate such apparently irrational behavior.
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[...] Short-bias hedge funds: Masochists or Yeomen? [...]
[...] Are short-bias funds crazy or simply stubborn? (via All About Alpha) [...]
[...] I’m not a fan of shorting, particularly in this environment. Too many players are short without a real edge. High valuations are not enough, you need to have an uncommon edge. When I short, that typically means an accounting anomaly. That said, there is more demand for short ideas with the advent of 130/30 and 120/20 funds. Personally, I think they are asking for more than the system can deliver. Obvious shorts are full up, and inobvious shorts are inobvious for a reason; they aren’t easy money. [...]
[...] I’m not a fan of shorting, particularly in this environment. Too many players are short without a real edge. High valuations are not enough, you need to have an uncommon edge. When I short, that typically means an accounting anomaly. That said, there is more demand for short ideas with the advent of 130/30 and 120/20 funds. Personally, I think they are asking for more than the system can deliver. Obvious shorts are full up, and inobvious shorts are inobvious for a reason; they aren’t easy money. [...]
[…] Are short-bias funds crazy or simply stubborn?
Neither! The market needs a short element to keep the rampant herd mentality in check. If everyone is betting one way on a stock why not someone betting the other side; after all– it is the world’s biggest casino. I think in bull markets it’s much easier to identify overextended, overvalued, laggers; or even easy targets such as the mortgage insurers or investment banks than stars or market darlings. Don’t get me wrong I have favorites, and when the price drops I’m in buying them, but I still take profits off the table and wait for a new bottom.
I had two prominent investment bankers from Fortis sit in my office offering to manager short-term private equity funds not yet deployed in a portfolio of bear, goldman, lynch, lehman, ms, all of them, in October 2007 because “they hit their bottoms.” They projected 10% a month before fees and costs. I had just started shorting them at this point due to mortgage projections from a colleague and once I look at the pipeline of defaults coming down the line I jumped on board. I never thought that the entire world would lose trillions from essentially betting on our real estate market. It’s kind of amazing if you think about it. Nations were betting on the upward momentum our our wealth and property.
Short sellers are the realists in the market when it comes to overvalued & over leveraged entities. Granted they can crush a company, but isn’t that the point of capitalism, to extinguish the weak and support the strong. I mean if you believe the rhetoric of financial talking-heads and politicians when times are good you would think Adam Smith was running things, but when times are bad they change the rules– and prove the truth, that all governments are more or less socialist and protectionist. Airlines, Automotive, Banking, Defense, Railway, Oil and many more.
Policy and actions dictate reality not rhetoric.