How Complicated is it to Short Stocks?

It hasn't been a good year for short sellers.

Apr 21, 2015 at 10:40 AM
facebook X logo linkedin

It certainly feels like a grind trying to make some money on the long side in 2015. But, it's no picnic for the shorts, either. This, from Jennifer Ablan and David Gaffen at Reuters:

"Through the end of March, Credit Suisse's index that measures the performance of short-biased funds is down 4.4 percent, while its market-neutral index - measuring funds that match long and short bets - is off by 1.6 percent. In comparison, CSFB's broad index of all hedge funds is up 2.6 percent."

That's not exactly a value add. The SPDR S&P 500 ETF Trust (SPY) was up 0.4% from year-end through the end of March, so short funds, generally managed by some pretty sharp minds, wildly underperformed "Blind Squirrel" funds that just shorted SPY. Market-neutral funds performed pretty poorly, as well. But hey, at least long-based funds sort of earned their 20% fees (or whatever they take in). But, at least they are reacting:

"Since October, long-short equity funds -- which take long positions in stocks expected to increase in value and short stocks expected to decrease in value -- have been gravitating more to long bets than at any time since August, according to the Credit Suisse data. In particular, they have been pulling back on unprofitable short positions taken earlier in the year."

The post mentions Bill Fleckenstein, one of the patron saints of shorts over the past couple decades. He started to form a short-based fund back in January 2014 and didn't even get it launched. Taken on the margins, this all sounds like a contra tell. I mean, if shorts start cutting back, throw in the towel, or can't even get out of the starting gate, maybe it's time to think about actually starting to short?

Plus, I'd suggest it's not so much that shorting is a disaster, rather that they should just do it better. Again, they're performing very poorly, even vs. simple-index shorting. It's not just strong market wind in their face -- in fact, the wind is incredibly tame this year.

They mention a disastrous value-based short, Shake Shack Inc (NYSE:SHAK), which has nearly tripled since launch. Setting aside that the burgers there are great, I'm sure the stock itself is overpriced. But, every generation of dedicated shorts gets hammered on plays like this. Hot stock gets hotter, and stretched value has little bound to how stretched it can get.

The shorts that tend to ultimately work are the "story" names where published numbers mislead or willfully misrepresent, and they add value with excellent research. The ones that don't tend to work are good companies with inflated multiples. It's just very, very tough to time well. It sounds more like they're leaning too much toward the latter.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.



How to collect 1 dividend check every day for LIFE

Did you know you could collect 1 dividend check every day the market is open? You could also do it starting with just $605! For me, I'm collecting 70 dividend checks every quarter…which averages around 1.1 dividend checks every business day. There's no trading behind this... no penny stocks or high-risk investments. All you do is buy and hold and you're set. There's no set up required either. If you start buying the dividend stocks I show you today... you could collect 1 dividend per day starting as early as this week. Click here for all the details.