March 19, 2017 Leave a comment
A certain venerable gentleman (and scholar) claims to have found the “best kept secret of short selling”. What is he referring to? Is he right?
"Question unchallenged assumptions" – Unknown/Anonymous
March 11, 2017 Leave a comment
A friend – I will refer to him as “John Doe” – known for cautioning against short selling over the last 1-2 years – escalated his rhetoric yesterday with the following claims:
Are the above claims true? Here’s what I believe:
Let’s examine each claim, one by one:
“The success of shorting as a strategy is evident here” – MOSTLY TRUE
John Doe sarcastically wrote “The success of shorting as a strategy is evident here” in response to the following tweet:
John Doe is correct in implying that short selling – as a business – has been terrible (a fact, that is very well known among short sellers!). However, I would not use HFR data as the basis of your argument. I can tell you firsthand that these data sets are quite imperfect (to put it politely). There is far superior supporting evidence, to the assertion that short selling has been terrible business:
There are some historically unprecedented reasons (post 2008) why short selling has been a terrible business. But no excuses, John Doe is correct: short selling business has been particularly bad business in recent years.
“Shorting as a strategy is the same kind of fraud that they claim to sniff out. Glad market sees it.” FALSE
The above claim that “shorting as a strategy is a fraud” goes beyond his usual “short selling is dangerous” rants (which I generally find to be well-intended and in the public interest, for the simple reason that short selling is so difficult).
I find John Doe’s claim false for the following reasons:
“it’s a pipe dream that has a shelf life of a Twinkie.” TECHNICALLY TRUE, BUT IRRELEVANT
It is a fact that short funds have a high mortality rate (“a shelf life of a Twinkie”), and die at a young age…just as hedge funds do in general:
Most hedge funds fail: their average life span is about five years. Out of an estimated seventy-two hundred hedge funds in existence at the end of 2010, seven hundred and seventy-five failed or closed in 2011, as did eight hundred and seventy-three in 2012, and nine hundred and four in 2013. This implies that, within three years, around a third of all funds disappeared. The over-all number did not decrease, however, because hope springs eternal, and new funds are constantly being launched.
So yes, short funds are hedge funds. Hedge funds die young. So what’s your point, John Doe (unless you’re alleging that short funds’ life span is dramatically even shorter than the already short 3-5 year life expectancy of all hedge funds!)
“There isn’t one short fund there w compounded long term double digit returns.” DEBATABLE
If John Doe is claiming that none of the short funds within that HFR sample can boast of a long term double digit returns…I am inclined to agree. However, I know for a fact that there have been at least three short funds that were able to boast of long term double digit returns – Rocker Partners, Water Street Capital, and the Feshbach Brothers’ fund(s). So if he is claiming that it cannot be done? I think that is simply not true.
“Because since shorting doesn’t actually make any money I consider anyone who does it for a living an embarrassment to the industry.” I VEHEMENTLY DISAGREE
I know people who have made money via short selling, so if the John Doe’s logic is:
If “one does not make money” , –> then “one is an embarrassment to the industry”.
and if there are short sellers who have and do make money…that would seriously undermine the John Doe’s “reasoning”.
There have been far richer hedge fund managers who have made a variation of the above argument: “where are the billionaires who made their money via short selling?” i.e., therefore short selling is a waste of time, waste of money.
At face value, the above is an excellent point: short selling is not the path to riches. I am not aware of a single billionaire – in the world – who made their money solely short stocks.
But it is my opinion that the above thought process misses the point.
I personally like John Doe and believe that the vast majority of his tweets about short selling are not only true, but practically helpful to people in the business. I happen to agree with his bottom-line: most stock pickers in the hedge fund industry should not short stocks (in turn, their investors should also pay them far less, and/or purely on profits).
In this piece, I evaluated the merits of his claims (in this case, the lack of merit to his claims) on their own feet. Truth stands on its own feet. Is it possible that he believes and/or is propagating false claims for other motives?
Perhaps John Doe feels threatened by fund managers with short selling prowess, when it comes to the business of raising money. It is my understanding that John Doe had a good/great 2016, performance wise, and that he has attracted some outside money recently (and is looking to attract more money. Kudos to him).
When asked why should he care about short selling funds, John Doe clearly acknowledged that he sees them as competition for raising money. That is puzzling to me; if short selling funds don’t make any money, and John Doe is “glad market sees that”…lol, why and how are we your competition?
Maybe he feels threatened because the truth hurts; I know people deploying similar/greater amounts of money as John Doe, who had a similar/better year in 2016 than John Doe did…purely by shorting stocks. It is my understanding John Doe is a long only, with a concentrated portfolio of stocks. So this means that these people I know not only generated similar/better returns in 2016 as John Doe…their alpha was significantly higher. Imagine that.
I will close with two thoughts:
January 7, 2017 Leave a comment
Active fund management continues its decline (both in popularity/adoption, as well as in realized performance), even as passive investing moves in the opposite direction. One needs to look no further than [aggregate] hedge fund performance in 2016. Like 2015, yes, you had some notably good performers…only to be offset by notably poor performers.
Concurrently, “quantitative investment management” (which I prefer calling “non-discretionary trading”) remains in vogue. Look no further than the assets under management of AQR and the likes, of the world… or the political influence of Renaissance Technologies (though, in fairness, Rentech has been anything but an ‘asset gatherer’).
Question: What effect – if any – do the simultaneous popularity/success of ‘passive investing’ AND ‘quantitative investment management” today have on their future returns/losses (and the smoothness/volatility of those returns/losses) ?
Let’s oversimplify and say that the ‘alpha’ of the non discretionary participants arise 100% out of the discretionary active participants. If the actives are being pushed out because of both the passive AND quantitative trends… does that not diminish the alpha opportunity set for the non discretionarys? What if I were tell you that some of these non discretionarys use 10x-20x leverage…on their equities books?
Some of you may recall the “great quant meltdown of [August] 2007”, that occurred just under 10 years ago.Seemingly invincible quant funds experienced sudden and meaningful declines (e.g. -5 to -30%).
The likes of Soros, Druckenmiller, Paulson, etc… all great wealth compounders for themselves AND outside investors – eventually experienced real/meaningful drawdowns/losses.
Given that the capital flows towards passive and quant have largely occurred at the expense of active management… i.e., as passive and/or quant become more ‘crowded’ … are they truly immune to what the likes of Soros/Druckenmiller/Paulson all eventually experienced?
I think not.
ADDENDUM on 1/9/2017
Perhaps quant alpha now and in the future, just might (also) be derived from the negative alpha of other quants. For example:
BlackRock Quants Sustain Record Losses in Setback to Fink Plan
BlackRock’s main quantitative hedge-fund strategies — which use computer models to sort through vast amounts of data to pick out patterns — were on track for losses in 2016, according to a monthly client update sent out in late December. Of the five included, four were set for their worst returns on record, data through November showed.
I don’t what the sources of the losses were..but it is a possibility worth entertaining.
December 22, 2016 Leave a comment
The year is more or less over. As we head into 2017, here are a few things that make you go ?:
Interpret at will.
November 19, 2016 Leave a comment
It’s been just over 10 days since the US Presidential election, and I sense that many Americans – and market participants – are still in a state of “denial or anger”. That said, some people have moved on towards ‘acceptance’ (e.g. Dalio, Buffett, President Obama, etc). From my perch, it’s too early to say.
Based on public reaction, there are reasons both to be hopeful, and to be concerned (whether these hopes and concerns are meritorious or not, remains to be seen):
Reasons to be hopeful – the appointment of the likes of Jamie Dimon, Nikki Haley, Mitt Romney, etc mentioned as potential Trump Cabinet members – have given hope even to the likes of the Vox founder, a known Hillary Clinton propagandist https://twitter.com/ezraklein/status/799369055207497728
(most of) Donald Trump’s own words – e.g. 60 minutes interview – emphasize unity, repudiation of violence, economic expansion (e.g. infrastructure spending), etc.
President Obama and Donald Trump’s public behavior towards one another has uplifted public/market confidence as well.
Reasons to be concerned – the appointment of the likes of Steve Bannon, Jeff Sessions, and Michael Flynn have caused fear in many Americans. By some measures, reported acts of violence have creeped up.
The rhetoric regarding “bringing jobs back to America” is encouraging, but it’s just that: rhetoric. What happens if rates rise in a meaningful fashion, leading to runaway inflation? Rising unemployment and inflation would be a very difficult situation – whether the Trump administration is at fault or not.
My View: Too early to say.
As it pertains to financial markets, I have observed:
My prior posts have been helpful and remain relevant:
The sum result on financial markets is not immediately clear, especially as it relates to US financial markets. What is clear(er) to me is the growing importance of global macro, or at least understanding how global macro impacts one’s investment strategy. Specifically, I will be surprised if the following are NOT true, going forward:
- (Continued) Record-breaking bi-directional macro volatility
- Confusing, inconsistent, and sometimes outright non-sensical correlations between headline political instability/violence versus financial markets price activity
I expect the 2nd half of 2016 to continue with record breaking market activity.
- Rise of Nationalism. Pretty much everywhere.
- Trump is winning. Bernie Sanders Super Tuesday results disappointing. The loudest Trump critics appear to misunderstand him and his fans. No matter, both point to regime change. Note that “regime change” in Asia and Europe before the modern era, were often accompanied by executions.
- Supreme Court, replacement for Antonin Scalia.
- Regulatory enforcement is rising (after decade-low levels of white collar fraud enforcements through 2013/2014″ e.g. Valeant Pharmaceuticals. Regime change.
- Europe – Brexit, Spain (Visca Catalunya), threats to Schengen, etc.
- China – Xi regime gives off the impression of a more nationalistic tone.
The above lead me to believe that we are transitioning from one state to another… methinks the ‘regime change’ may resemble the transition from the dot com bubble/bust to housing bubble/bust. We’re somewhere in between two different regimes.
What I like entering 2017:
The short answer is, TBD; I’m not sure. That said, if I had to place all my capital into one trade for the next 12 months, there is one that comes to mind, with unlevered expected return of over 20%: it’s a quasi-arbitrage situation. It is a meaningfully sized position.
It involves going short the underlying security and long the one related to underlying one. I say quasi, because if the equity markets were to correct (or if the underlying security were to continue declining), I believe there would be a meaningful risk that the current gap (which shouldn’t exist, or at least, be this wide) widens further. But that would excite me only more.
September 26, 2016 1 Comment
“There are plenty of people out there who call themselves Buffett acolytes – and as far as I can see they are all phoneys. Every last one of them.” – John Hempton circa Anno Domini 2016
I read John Hempton’s Comments on investment philosophy – part one of hopefully a few… and felt inspired to write a few disparate (potentially related) thoughts:
Specific Commentary (Hempton’s quotes are in bold, while my commentary is not in bold):