[DcifrThs]

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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