In recent years, one of the least-talked-about but obvious trends in the hedging world was hedge funds doing less of what I'd call genuine shorting for the hedging portion of their funds. Never mind that the number of genuine short-dedicated funds has shrunk to a handful.
Instead, it appears that many long-short hedge funds have taken the safety-in-numbers (a.k.a. lazy) way out, by either A) using cash as their hedge or B) shorting indices via exchange-traded funds.
On the surface it made sense, especially in a market that could do nothing but go higher. After all, why put yourself through the rigor required to short, or go against the crowd? Doing so requires extraordinary research and conviction. And why put yourself through the anguish of dealing with the negative psychology (not to mention squeezes) associated with being short individual stocks when everybody is so smug about how easy it has been to make money being long?
Because if you're right, the results can be much better than the short indices, thus providing a true alpha-generating hedge.
This may be (no, is) self-serving, but the average red-flagged stock on the Reality Check Research Report Watch List, as of Wednesday, was down an average of 16% since initiation. (If shorted and held, that would be a 16% gain; if sold or not owned, that would be money not lost.) And the market's swoosh only added to what already had been generous declines on fundamentally flawed names.
Among those losers:
Carbo Ceramics (CRR) is down 52% since initiated in August -- and that's after it had already fallen 30%.
Nu Skin (NUS) is off 42% since January.
SolarCity (SCTY) is down 23% from March.
Western Union (WU) is off by 10% since July.
Reality: All of this, of course, is easier said than done. Short-selling isn't for everybody, but for those who are paid to do it, you would think they would -- and that they'd do it the old-fashioned way, name by name. As this market shows us, on the short side, at least, stock-picking still has its moments.
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