Ultrashort ETF: Good if Feeling Bearish?
 

Arright, I know things are much more complicated than I make them, and there is no clear yes or no answer, but here are my thaughts on the subject. I'll be using myself as the example, but this isn't a "what should I do thread".

I'm 21, and have very little money (I guess a lot compared to most 21 year olds). About 8 months ago I began following the stock market, but was hesitant to invest b/c it was reaching new highs every week. Now, this was just a gut feeling, not based on anything.

Anyway, a few weeks ago, I decided to put my money into 2 funds (diversification is not an issue right now IMO). One was a proshares ultrashort http://www.proshares.com/funds?produ...&fundType= and the other was a mutual fund that does not hedge or short. I would classify both as fairly high risk. Ultra short is (inverse of index)X(2) I believe.

The reason I have 33% of my portfolio in the proshares ETF is b/c I feel it's letting me invest regardless of which way I feel (bullish/bearish). I guess my option (as a not very educated invetsor) was to either try to ride the wave and put some money into a hot stock like RIM or APPL, put it into a random mutual fund and hope the economy continues to rise, or put it into a cd and get like 4% return.

Now let me clear things up, before I get pownded here:

Losing 100% of my portfolio would not really hurt me financially, it makes up less than 10% of my liquid net worth. This is why I have not diversified at all.

I am slowly constructing my portfolio, so as I add investments, my position in each investment will go down as a % of my entire portfolio.

I invested it the way I did, b/c It was money that was not being used, and I felt I needed to make the leap of faith. Losing it would not mean much to me.

Anyway, my ultimate question, (now that you guys may understand the way I am thinking) is:

Are Short and Ultrashort funds a reasonable alternative to not investing (because the market is overvalued, or in a recession)?

If you are feeling bearish, is there an alternative to hedge funds or short ETFs?

Any other ideas/discussion you may have? I am sure there are many things I have overlooked, so hopefully after this thread I may get a clearer sense of what I am dealing with.

Re: Ultrashort ETF: Good if Feeling Bearish?
 

I don't have anything to add, but these sound pretty interesting. Thanks for bringing them up!

Re: Ultrashort ETF: Good if Feeling Bearish?
 

Yeah short the ETFs that are long but it depends on the size of your account sort of and the type of account. In an IRA I think you have to use the short ETFs. Better customers can get better deals with money tied up in shorts and you can use leverage to your benefit, the same leverage you get from ultra short ETFs.

Here's a linky explaining the "short rebate."

Making Sense of the Short Stock Rebate

Done for awhile. Later.

Re: Ultrashort ETF: Good if Feeling Bearish?
 

It sounds like you have money in shorts and longs in a similar market. I'm not sure what the regular mutual fund is, but it seems to me that your 2 investments are cancelling each other out.

Also, I'm wondering what specifically made you decide to take a leveraged short position and at what point will you sell at a profit/loss? Remember that even an experienced investor/trader can find it very difficult to extract profits out of a short stock fund.

Re: Ultrashort ETF: Good if Feeling Bearish?
 

fwiw the ultrashort I hold is SKF:

http://finance.google.com/finance?q=AMEX%3ASKF

a financial sector short. I think these stocks keep getting punded,and the outlook on the sector looks negative in the shortrun (at the very minimum). However I also feel which every week these stocks plunge, they are a good value buy (possibly b/c media/ wall street overreacts to everything?), so I reckon I will have to let go of SKF (which is shorting the sector) sooner or later, and possibly buy some Citigroup or wamu, etc...

Re: Ultrashort ETF: Good if Feeling Bearish?
 

Just short everything. No long.

Thank me later

Re: Ultrashort ETF: Good if Feeling Bearish?
 

I could be wrong but I think you are paying for that 2x short somehow. I think its supposed to closely match the daily movements of the index by -2x, however, I think holding this longish term is a guaranteed loser even if the market continues to go down over that time. I'm just guessing, but I think it would be similar to 1.95x the downswings, and -2.05x the upswings. Eventually the rake kills you.

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I could be wrong but I think you are paying for that 2x short somehow. I think its supposed to closely match the daily movements of the index by -2x, however, I think holding this longish term is a guaranteed loser even if the market continues to go down over that time. I'm just guessing, but I think it would be similar to 1.95x the downswings, and -2.05x the upswings. Eventually the rake kills you.

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yea there was some post that linked a good analysis of leveraged funds and why they suck. i just did a simulation though and the returns of hitting the double value every day does result in the average long run daily value being about double the daily value...but i obviously didn't take many things into account.

Barron

Re: Ultrashort ETF: Good if Feeling Bearish?
 

I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

Second, these leveraged ETFs are only trading instruments. Do not hold them for long periods of time. They only capture twice the daily returns, but capture much less over the long run.

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

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this is very poor reasoning.

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Second, these leveraged ETFs are only trading instruments. Do not hold them for long periods of time. They only capture twice the daily returns, but capture much less over the long run.

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yup. i failed to capture that in my rudimentary simulation but that is definitely the case.

Barron

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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It sounds like you have money in shorts and longs in a similar market. I'm not sure what the regular mutual fund is, but it seems to me that your 2 investments are cancelling each other out.

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No. You can use shorts to do a lot of things. One thing that a lot of people do is use shorts to be "market neutral:"

Market Neutral

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

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this is very poor reasoning.



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I know his reasoning can't be correct, but I don't see why. Can you explain further?

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

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this is very poor reasoning.



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I know his reasoning can't be correct, but I don't see why. Can you explain further?

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I feel dirty. Like a poker player just threw up on my wall street journal.

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.



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I know his reasoning can't be correct, but I don't see why. Can you explain further?

[/ QUOTE ]

it is very simple. shorting an asset with a positive risk premium can be + EV.

if you expect the price to move down to a certain degree within a certain timeframe, why would you not short it?

look at it in the converse. since ALL assets have some risk premium built into them (except developed world currencies), gull is saying that it is -EV to be short anything. that is clearly not the case since there are many a time when ex ante being short is correct and + EV.

even breaking apart the term "risk premium" we see that you are being compensated for taking risk. risk implies volatility and volatility implies up and down moves. if you can forsee a downmove (not easy but certainly doable) and you have the ability to take a short position in it, clearly you can profit in expectation.

Barron

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.



[/ QUOTE ]

I know his reasoning can't be correct, but I don't see why. Can you explain further?

[/ QUOTE ]

it is very simple. shorting an asset with a positive risk premium can be + EV.

if you expect the price to move down to a certain degree within a certain timeframe, why would you not short it?

look at it in the converse. since ALL assets have some risk premium built into them (except developed world currencies), gull is saying that it is -EV to be short anything. that is clearly not the case since there are many a time when ex ante being short is correct and + EV.

even breaking apart the term "risk premium" we see that you are being compensated for taking risk. risk implies volatility and volatility implies up and down moves. if you can forsee a downmove (not easy but certainly doable) and you have the ability to take a short position in it, clearly you can profit in expectation.

Barron

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Ohhhhh Barron, you and your silly multi-paragraph answers. Next time just say "short-run vs long-run"

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.



[/ QUOTE ]

I know his reasoning can't be correct, but I don't see why. Can you explain further?

[/ QUOTE ]

it is very simple. shorting an asset with a positive risk premium can be + EV.

if you expect the price to move down to a certain degree within a certain timeframe, why would you not short it?

look at it in the converse. since ALL assets have some risk premium built into them (except developed world currencies), gull is saying that it is -EV to be short anything. that is clearly not the case since there are many a time when ex ante being short is correct and + EV.

even breaking apart the term "risk premium" we see that you are being compensated for taking risk. risk implies volatility and volatility implies up and down moves. if you can forsee a downmove (not easy but certainly doable) and you have the ability to take a short position in it, clearly you can profit in expectation.

Barron

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ok, but would you agree that since stocks as a whole have a positive expectation that it should theoretically be more difficult to find a good short than a good long?

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.



[/ QUOTE ]

I know his reasoning can't be correct, but I don't see why. Can you explain further?

[/ QUOTE ]

it is very simple. shorting an asset with a positive risk premium can be + EV.

if you expect the price to move down to a certain degree within a certain timeframe, why would you not short it?

look at it in the converse. since ALL assets have some risk premium built into them (except developed world currencies), gull is saying that it is -EV to be short anything. that is clearly not the case since there are many a time when ex ante being short is correct and + EV.

even breaking apart the term "risk premium" we see that you are being compensated for taking risk. risk implies volatility and volatility implies up and down moves. if you can forsee a downmove (not easy but certainly doable) and you have the ability to take a short position in it, clearly you can profit in expectation.

Barron

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ok, but would you agree that since stocks as a whole have a positive expectation that it should theoretically be more difficult to find a good short than a good long?

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no because if you are investing from a tactical standpoint, you want your signal to be equally likely to generate a positive vs. a negative.

risk premiums take a long time to acheive vs. tactical positions which reach fruition over much shorter time spans.

so basically, you want a uniformally distributed signal which is equally likely to go short as long.

i think i'm rambling again and CF covered it anyways. short term vs. long term.

Barron

Re: Ultrashort ETF: Good if Feeling Bearish?
 

[ QUOTE ]
I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

Second, these leveraged ETFs are only trading instruments. Do not hold them for long periods of time. They only capture twice the daily returns, but capture much less over the long run .

[/ QUOTE ]

Absolutley TRUE...I dont have the exact math calculations off-hand,but it does seem that TIME def. "decays" their value,and it is CERTAINLY NOT a direct 2x leveraged instrument the longer you hold onto them

The "short" based Nasdaq ETF ....(symbol QID) ...which is supposed to be inverse of "buying a Nasdaq basket of stocks" or QQQQ's for that matter) is a prime example.

Even though you are BUYING this ETF,you are being "sold on the idea/premise" that you are shorting the Nasdaq with a LIMITED downside risk.In other words ...if you BUY 1000 QID's currently trading at $39.91...the maximum loss you can have in theory on this trade if it went to ZERO is $39,910 (obv.minus commissions's of course)

On the other hand if you "shorted" the QQQQ's.....this instrument would have an infinite loss potential.

When comparing these TWO instruments...they DEF dont move tick for tick in opposite directions PERCENTAGE wise(as they are also priced differently) with this perceived 2x move

But it does seem that the 2x expectation is NOT true over longer periods of time ...even MORE so with these short based ETFs.I have found that on the EXTREMELY volatile days...it moves much closer to its 2x "promise"...but without a doubt in a flat market/longer term expectation...it def. has some time decay formula tied to it IMO

When I was trading fulltime in my prime a few years back... they didnt have this particular ETF(the QID)as it is fairly new I believe....and the ONLY way to short the Nasdaq as a whole was to short the cubes .

BUT...I have just heard from trader friends of mine that recently some brokers/clearing houses DONT even allow you to short these cubes any longer?

Has anybody heard similar or had a problem attempting to SHORT the QQQQ's RECENTLY with their respective brokers?


GL
Stephen [img]/images/graemlins/cool.gif[/img]

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.



[/ QUOTE ]

I know his reasoning can't be correct, but I don't see why. Can you explain further?

[/ QUOTE ]

it is very simple. shorting an asset with a positive risk premium can be + EV.

if you expect the price to move down to a certain degree within a certain timeframe, why would you not short it?

look at it in the converse. since ALL assets have some risk premium built into them (except developed world currencies), gull is saying that it is -EV to be short anything. that is clearly not the case since there are many a time when ex ante being short is correct and + EV.

even breaking apart the term "risk premium" we see that you are being compensated for taking risk. risk implies volatility and volatility implies up and down moves. if you can forsee a downmove (not easy but certainly doable) and you have the ability to take a short position in it, clearly you can profit in expectation.

Barron

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Ohhhhh Barron, you and your silly multi-paragraph answers. Next time just say "short-run vs long-run"

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QFT

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.



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I know his reasoning can't be correct, but I don't see why. Can you explain further?

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It's unfortunate that certain posters display their arrogance in answering a question that's been put forth honestly with the intent of gaining some knowledge.

Actually it's really not poor reasoning per se IMO. For some reason many people think they always know what the price of a stock should be. Of course they probably wouldn't be trying to impress us with their knowledge if that was actually the case. There are many reasons to short a stock and of course one reason is that you believe it's over valued for whatever reason. Doesn't have to be a short term trade either.

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.



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I know his reasoning can't be correct, but I don't see why. Can you explain further?

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It's unfortunate that certain posters display their arrogance in answering a question that's been put forth honestly with the intent of gaining some knowledge.

Actually it's really not poor reasoning per se IMO. For some reason many people think they always know what the price of a stock should be. Of course they probably wouldn't be trying to impress us with their knowledge if that was actually the case. There are many reasons to short a stock and of course one reason is that you believe it's over valued for whatever reason. Doesn't have to be a short term trade either.

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Ok, I can certainly see how some instances would be +EV to go short on a stock, and even remain short for a long period of time (so long as the company remained overvalued).

What I'm trying to grasp is a more theoretical concept of what happens when you take a long position on a random stock vs taking a random short position. In the first case, you are giving up the use of funds to get a return, much like a CD or bond. But since the risk is higher, your returns are better. When you short, it's as if you're the one taking out a loan, but now you're paying the high-interest (market return) that the loaner only recieves because of the risk he takes on. And yet, you take on this same risk. To me that doesn't make sense.

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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What I'm trying to grasp is a more theoretical concept of what happens when you take a long position on a random stock vs taking a random short position. In the first case, you are giving up the use of funds to get a return, much like a CD or bond. But since the risk is higher, your returns are better. When you short, it's as if you're the one taking out a loan, but now you're paying the high-interest (market return) that the loaner only recieves because of the risk he takes on. And yet, you take on this same risk. To me that doesn't make sense.

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Of course not. Shorting a stock randomly is idiotic.

This is like saying "moving all-in with 52o doesn't make sense to me." Of course it doesn't make sense as something you would do randomly. But it can be a winning play if the context is right. Just like shorting can be a winning play if the context is right.

eastbay

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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What I'm trying to grasp is a more theoretical concept of what happens when you take a long position on a random stock vs taking a random short position.

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Ok.

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In the first case, you are giving up the use of funds to get a return, much like a CD or bond. But since the risk is higher, your returns are better.

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Pretty much.

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When you short, it's as if you're the one taking out a loan,

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Sort of... you borrowed a stock from someone and sold it at the current market price and you are to return that stock at some point in the future by buying it back (hopefully at a lower price than you initally sold it).

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but now you're paying the high-interest (market return)

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I sure hope you don't expect to do this; the point of selling short is because you think the return on this stock will be negative.

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.



[/ QUOTE ]

I know his reasoning can't be correct, but I don't see why. Can you explain further?

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If you randomly pick a stock it should so a long term expected return of 10% or so. Obviously shorting a stock at random has a -EV. There are those who will tell us they are better than random at selecting stocks to short, even better than the 10% vig they give up plus increased taxes (short term versus long term). I have seen no proof that this is possible except by those that are results oriented (i.e., I made 5 profitable short trades in the last 30 days).

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.



[/ QUOTE ]

I know his reasoning can't be correct, but I don't see why. Can you explain further?

[/ QUOTE ]

If you randomly pick a stock it should so a long term expected return of 10% or so. Obviously shorting a stock at random has a -EV. There are those who will tell us they are better than random at selecting stocks to short, even better than the 10% vig they give up plus increased taxes (short term versus long term). I have seen no proof that this is possible except by those that are results oriented (i.e., I made 5 profitable short trades in the last 30 days).

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do you think that at any point in time it is +EV to fundamentally be short a broad based stock index?

if no then think about all the long/short equity hedge funds. do you think they are all (the successful ones) just lucky?

and from a more basic perspective, do you think that they could generate the interest they have from very picky institutional investors if it couldn't be +EV to short a stock or a broad based stock index?

there is a lot more logical proof i can give you, but since i don't have access to fund's return streams (anymore) i can't provide statistical evidence to back the logic.

Barron

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.



[/ QUOTE ]

I know his reasoning can't be correct, but I don't see why. Can you explain further?

[/ QUOTE ]

If you randomly pick a stock it should so a long term expected return of 10% or so. Obviously shorting a stock at random has a -EV. There are those who will tell us they are better than random at selecting stocks to short, even better than the 10% vig they give up plus increased taxes (short term versus long term). I have seen no proof that this is possible except by those that are results oriented (i.e., I made 5 profitable short trades in the last 30 days).

[/ QUOTE ]

do you think that at any point in time it is +EV to fundamentally be short a broad based stock index?

if no then think about all the long/short equity hedge funds. do you think they are all (the successful ones) just lucky?

and from a more basic perspective, do you think that they could generate the interest they have from very picky institutional investors if it couldn't be +EV to short a stock or a broad based stock index?

there is a lot more logical proof i can give you, but since i don't have access to fund's return streams (anymore) i can't provide statistical evidence to back the logic.

Barron

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I will grant you there are very very succesful hedge funds who generate very high returns. It reminds me in the late 80's when S&L's were piling 95% debt on a 5% equity base for all sorts of exotic investments. Were they plus EV? It sure seemed so at the time. They were geniuses!

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.



[/ QUOTE ]

I know his reasoning can't be correct, but I don't see why. Can you explain further?

[/ QUOTE ]

If you randomly pick a stock it should so a long term expected return of 10% or so. Obviously shorting a stock at random has a -EV. There are those who will tell us they are better than random at selecting stocks to short, even better than the 10% vig they give up plus increased taxes (short term versus long term). I have seen no proof that this is possible except by those that are results oriented (i.e., I made 5 profitable short trades in the last 30 days).

[/ QUOTE ]

do you think that at any point in time it is +EV to fundamentally be short a broad based stock index?

if no then think about all the long/short equity hedge funds. do you think they are all (the successful ones) just lucky?

and from a more basic perspective, do you think that they could generate the interest they have from very picky institutional investors if it couldn't be +EV to short a stock or a broad based stock index?

there is a lot more logical proof i can give you, but since i don't have access to fund's return streams (anymore) i can't provide statistical evidence to back the logic.

Barron

[/ QUOTE ]

I will grant you there are very very succesful hedge funds who generate very high returns. It reminds me in the late 80's when S&L's were piling 95% debt on a 5% equity base for all sorts of exotic investments. Were they plus EV? It sure seemed so at the time. They were geniuses!

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thats a nice try but the shops i'm talking about have been in existance since the time of the S&Ls. and they've survived all these market environments.

being short can be + EV just like being underweight the index can.

and that is my next example. is it ever +EV to be less than 100% allocated to an index that you are managing?

i think that is very well documented and sniper linked a paper which very good signals were generated from looking at the allocations of the best managers...and the changes in allocations. one criteria for "best manager" was previous high alpha generation. when those with high alpha generation changed their allocation and eliminated a stock that action was taken as a sell signal. that proved in backtests to be robust "+EV"

but as you can see, the logical leap from being "less than fully allocated" to "being short" is both direct and clear.

if it is ever +EV to sacrifice the risk premium by being underweight when youi can't go short (which is the reason many managers engage in that type of activity) then it can be even better to be actually short.

when you are udnerweight, you are betting that the stock will underperform. when you have 0 weight, you are essenciallyb etting the stock will decline. if those bets are + EV, as they have proved to be for the high alpha generation managers, then clearly being short is even more + EV.

Barron

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

[/ QUOTE ]

this is very poor reasoning.



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I know his reasoning can't be correct, but I don't see why. Can you explain further?

[/ QUOTE ]

If you randomly pick a stock it should so a long term expected return of 10% or so. Obviously shorting a stock at random has a -EV. There are those who will tell us they are better than random at selecting stocks to short, even better than the 10% vig they give up plus increased taxes (short term versus long term). I have seen no proof that this is possible except by those that are results oriented (i.e., I made 5 profitable short trades in the last 30 days).

[/ QUOTE ]

do you think that at any point in time it is +EV to fundamentally be short a broad based stock index?

if no then think about all the long/short equity hedge funds. do you think they are all (the successful ones) just lucky?

and from a more basic perspective, do you think that they could generate the interest they have from very picky institutional investors if it couldn't be +EV to short a stock or a broad based stock index?

there is a lot more logical proof i can give you, but since i don't have access to fund's return streams (anymore) i can't provide statistical evidence to back the logic.

Barron

[/ QUOTE ]

I will grant you there are very very succesful hedge funds who generate very high returns. It reminds me in the late 80's when S&L's were piling 95% debt on a 5% equity base for all sorts of exotic investments. Were they plus EV? It sure seemed so at the time. They were geniuses!

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thats a nice try but the shops i'm talking about have been in existance since the time of the S&Ls. and they've survived all these market environments.

being short can be + EV just like being underweight the index can.

and that is my next example. is it ever +EV to be less than 100% allocated to an index that you are managing?

i think that is very well documented and sniper linked a paper which very good signals were generated from looking at the allocations of the best managers...and the changes in allocations. one criteria for "best manager" was previous high alpha generation. when those with high alpha generation changed their allocation and eliminated a stock that action was taken as a sell signal. that proved in backtests to be robust "+EV"

but as you can see, the logical leap from being "less than fully allocated" to "being short" is both direct and clear.

if it is ever +EV to sacrifice the risk premium by being underweight when youi can't go short (which is the reason many managers engage in that type of activity) then it can be even better to be actually short.

when you are udnerweight, you are betting that the stock will underperform. when you have 0 weight, you are essenciallyb etting the stock will decline. if those bets are + EV, as they have proved to be for the high alpha generation managers, then clearly being short is even more + EV.

Barron

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I don't see how being short stocks in a market that has gone from 2,000 to 14,000 has been plus EV. You are telling me you know hedge funds who have outperformed this market on their shorts over the past 20 years? This would have to be on a risk adjusted basis too. I would really like to see that trading record. Phenomenal!

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I don't see how being short stocks in a market that has gone from 2,000 to 14,000 has been plus EV. You are telling me you know hedge funds who have outperformed this market on their shorts over the past 20 years? This would have to be on a risk adjusted basis too. I would really like to see that trading record. Phenomenal!

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I know this is hard for you to imagine, but there are people in this world that actually know how to read a financial statement and evaluate stocks. Some of them even make money shorting stocks. Ever hear of James Chanos? Or Manuel Asensio?

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I don't see how being short stocks in a market that has gone from 2,000 to 14,000 has been plus EV. You are telling me you know hedge funds who have outperformed this market on their shorts over the past 20 years? This would have to be on a risk adjusted basis too. I would really like to see that trading record. Phenomenal!

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I know this is hard for you to imagine, but there are people in this world that actually know how to read a financial statement and evaluate stocks. Some of them even make money shorting stocks. Ever hear of James Chanos? Or Manuel Asensio?

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You think Jim Chanos got Enron right by scouring finnacial statements? Ha, good one. Sometimes inside sources are better than financial statements. Ever heard of Raymond Dirks? I believe you can make money shorting stocks, I don't believe it would have been plus EV to be net short stocks over the past 20 years. Although Chanos has had many succesful short sale calls over the past 20 years he was not 100% short, nor would he have beaten the market if he were.

I worked at the same firm as Chanos in the 80's and followed some of his short sale ideas in the 80's through a short sale newsletter written by a guy named Murphy I think, he also wrote a tech letter. Chanos is brilliant, no doubt, he has his sources though, like all good short sellers!

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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I would stay very far away from these investments.

First, stocks have a positive expectation (derived from the risk premium). Shorting an asset with a positive expectation is -EV.

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this is very poor reasoning.



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I know his reasoning can't be correct, but I don't see why. Can you explain further?

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If you randomly pick a stock it should so a long term expected return of 10% or so. Obviously shorting a stock at random has a -EV. There are those who will tell us they are better than random at selecting stocks to short, even better than the 10% vig they give up plus increased taxes (short term versus long term). I have seen no proof that this is possible except by those that are results oriented (i.e., I made 5 profitable short trades in the last 30 days).

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do you think that at any point in time it is +EV to fundamentally be short a broad based stock index?

if no then think about all the long/short equity hedge funds. do you think they are all (the successful ones) just lucky?

and from a more basic perspective, do you think that they could generate the interest they have from very picky institutional investors if it couldn't be +EV to short a stock or a broad based stock index?

there is a lot more logical proof i can give you, but since i don't have access to fund's return streams (anymore) i can't provide statistical evidence to back the logic.

Barron

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I will grant you there are very very succesful hedge funds who generate very high returns. It reminds me in the late 80's when S&L's were piling 95% debt on a 5% equity base for all sorts of exotic investments. Were they plus EV? It sure seemed so at the time. They were geniuses!

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thats a nice try but the shops i'm talking about have been in existance since the time of the S&Ls. and they've survived all these market environments.

being short can be + EV just like being underweight the index can.

and that is my next example. is it ever +EV to be less than 100% allocated to an index that you are managing?

i think that is very well documented and sniper linked a paper which very good signals were generated from looking at the allocations of the best managers...and the changes in allocations. one criteria for "best manager" was previous high alpha generation. when those with high alpha generation changed their allocation and eliminated a stock that action was taken as a sell signal. that proved in backtests to be robust "+EV"

but as you can see, the logical leap from being "less than fully allocated" to "being short" is both direct and clear.

if it is ever +EV to sacrifice the risk premium by being underweight when youi can't go short (which is the reason many managers engage in that type of activity) then it can be even better to be actually short.

when you are udnerweight, you are betting that the stock will underperform. when you have 0 weight, you are essenciallyb etting the stock will decline. if those bets are + EV, as they have proved to be for the high alpha generation managers, then clearly being short is even more + EV.

Barron

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I don't see how being short stocks in a market that has gone from 2,000 to 14,000 has been plus EV. You are telling me you know hedge funds who have outperformed this market on their shorts over the past 20 years? This would have to be on a risk adjusted basis too. I would really like to see that trading record. Phenomenal!

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yes. not all in stocks but bond markets and commodity markets as well.

1) lehman desk analytics prop book
2) goldman sachs's prop desk
2.5) probably other prop desks, but i don't have a confirmation or friends there enough to vouch for them.
3) renaissance (i don't have their trading record but have seen bits and pieces of their overall returns and know enough about their orientation to say very confidently that 10%-40% of their risk adjusted returns come from being short)
4) AQR (again, same as renaissance)
5) bridgewater

all of those have crushed the market on a risk adjusted basis from just being short. they've also beaten the market from being long. bridgewater i do know is a long term oriented fund and actually stays short in their positions that they are confident in for long periods of time and still crushes the market.

they are all + EV in their short positions. i don't know why it is such a big leap for you to understand that you can be +EV shorting a market at the right times (without hindsight) even if the overall market goes from 2k-14k...

Barron

Re: Ultrashort ETF: Good if Feeling Bearish?
 

Damn, edit time expired.

i just reread my post and i implied that all those places have 20 yr track records w/ short positions beating the market in risk adjusted returns. in fact, only the prop desks at lehman and goldman (though different people were running them) and bridgewater have that much consistent market beating experience.

Barron

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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Damn, edit time expired.

i just reread my post and i implied that all those places have 20 yr track records w/ short positions beating the market in risk adjusted returns. in fact, only the prop desks at lehman and goldman (though different people were running them) and bridgewater have that much consistent market beating experience.

Barron

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The leap is thinking that I or any other mere mortal can do it. Furthermore the caveat was you had to be only short stocks for 20 years, and I think that it would have been tough to beat the market being only short stocks the last 20 years. There are lots of ways well capitalized investors with informational advantages can beat the markets both on the long and short side. I had a client who used to arbitrage the small price discrepancies between the off the run Treasuries and current long bond. These things are all possible but I see a whole board full of good poker players who think beating the financial markets is something they can do in their spare time with $100,000. I think they are ill advised to think they can trade the markets actively with any sort of edge.

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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Damn, edit time expired.

i just reread my post and i implied that all those places have 20 yr track records w/ short positions beating the market in risk adjusted returns. in fact, only the prop desks at lehman and goldman (though different people were running them) and bridgewater have that much consistent market beating experience.
Barron

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My brother is one of the top derivatives/debt traders at Lehman Bros since 93'(being in their London office the last 7 yrs) and now recently coming back to the NY office this past summer........I will personally vouch for them as BURYING their perspective markets/competition on a year over year basis with relative EASE

His RIDICULOUS yearly bonus ..... substantiates that as well [img]/images/graemlins/smirk.gif[/img]

SF

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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Damn, edit time expired.

i just reread my post and i implied that all those places have 20 yr track records w/ short positions beating the market in risk adjusted returns. in fact, only the prop desks at lehman and goldman (though different people were running them) and bridgewater have that much consistent market beating experience.

Barron

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The leap is thinking that I or any other mere mortal can do it.

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i never said it was easy. that wasn't what i was talking about. you claimed it was impossible to make money being short because of a risk premium you get for being long. i'm simply providing evidence to prove this is incorrect thinking.

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Furthermore the caveat was you had to be only short stocks for 20 years, and I think that it would have been tough to beat the market being only short stocks the last 20 years.

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well i definitely misunderstood that. who would do that? my point is that it is possible to make money being selectively short...and beat the market doing so. if you have to have your hands tied to literally ONLY be short for a full 20 years, that wouldn't prove anything as nobody would do that...

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There are lots of ways well capitalized investors with informational advantages can beat the markets both on the long and short side.

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ok...well then i misunderstood your initial complaint. if you know it is possible to beat the market on teh short side, why would it not be the case that being short can be +EV?

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I had a client who used to arbitrage the small price discrepancies between the off the run Treasuries and current long bond.

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everybody did that. for a very long time.

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These things are all possible but I see a whole board full of good poker players who think beating the financial markets is something they can do in their spare time with $100,000. I think they are ill advised to think they can trade the markets actively with any sort of edge.

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for the most part i agree.

Barron

Re: Ultrashort ETF: Good if Feeling Bearish?
 

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These things are all possible but I see a whole board full of good poker players who think beating the financial markets is something they can do in their spare time with $100,000. I think they are ill advised to think they can trade the markets actively with any sort of edge.

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I agree with this statement 1000%

Stephen [img]/images/graemlins/cool.gif[/img]