For Short Bets, Higher Conviction = Higher Returns Hedge fund managers’ biggest short bets outperform the others, research finds. Amy Whyte August 20, 2019 Brent Lewin/Bloomberg When a hedge fund manager is highly confident in a short position, that bet is more likely to pay off, according to a newpaperfrom researchers at Imperial College London. Short bets made with high conviction outperform those which make up a smaller proportion of manager portfolios, found finance professors Pasquale Della Corte and Robert Kosowski and doctoral researcher Nicolas Rapanos. For the study, the trio analyzed publicly disclosed daily short positions in Europe from 2012 through 2018. They grouped shorted stocks into five portfolios ranging from the lowest-conviction shorts to the highest-conviction bets, and evaluated how each portfolio would perform on a long-only basis. “Investors’ confidence in each of their holdings is not uniform,” the Imperial College researchers wrote. “Investors allocate more capital toward the securities in which they have a higher level of conviction.” The companies which were shorted with the least conviction delivered the highest returns as long bets, with an equal-weighted version of the portfolio earning annualized returns of 8.15 percent, versus 7.72 percent for a value-weighted portfolio. Building Resilience in Multi-Asset Portfolios[/paste:font] The highest-conviction short bets, meanwhile, made for the worst long positions: The equal-weighted portfolio lost 1.28 percent, while the value-weighted portfolio produced annualized returns of just 0.67 percent. [IIDeep Dive: The Case for More Short Selling] Noting that the alpha produced by long bets appeared to decrease as short conviction rose, the authors suggested that “high-conviction shorts are indeed good shorts ex-post, whereas low-conviction shorts would be better as long investments.” However, in addition to higher conviction resulting in higher-performing short positions, the authors discovered that these stocks were more exposed to the risk of a “short squeeze,” or a “situation in which a heavily shorted stock may experience a rapid increase in price due to a positive development that is amplified as short-sellers cover their positions.” Other downsides of stocks that were shorted with the most conviction included higher borrowing fees and volatility, the authors found.
So higher risk = higher return. But also, am I right in thinking a fund needs to be more convinced of the value of a short position in a stock than a long position of equivalent size? After all, a long stock position is the default, as stock market indices tend to rise due to their inherent structure, so in that narrow sense shorting a stock, even a dog, is always contrary?
%% IF that were true, why do so many hedge funds underperform?? Lousy Longs or both ?? And since Paul Tudor Jones tends to do so well, dosent that make the ''average '' hedge fund look even worse??, NO offence to the GE or TSLA shorts ; looks like they are right+ the $40 million SEC fine maybe the beginning of the end to TSLA??
%% LOL .That is like saying BAC + bank robberies in CA are not part of a persistent pattern .Its also like saying the CA lender got a good bye @ auction =$1 billion list price property for $100,000 Fox news reported. , Good try.
I have no clue what you are talking about in this post. However, if you give me your address I will send you a new keyboard. Yours seems to have broken down near the end of your post.
You mean besides TSLA =crooked CA company?? Also, I also would not worry about a $40 million SEC fine/TSLA; but its sure not a slap on the wrist.,
I understand that for you $40 million is a hammer to your head, but for Tesla it is a slap on the wrist.
%% HUH Zreg?? Is that why the polar bears are slamming it/downtrend- slap on the wrist?? Try again; TSLA is down more >> than -33.3 %, YTD,