This Hedge Fund Strategy Ain’t Overcrowded

Everyone wants to be a contrarian.  Here is an interesting suggestion that a hedge fund can be contrary by selling stocks short.  The evidence here is not very convincing, since even those hedge funds that are not labeled as "short only" maintain substantial short positions and use leverage.

But first, take a look at the article.

Link: This Hedge Fund Strategy Ain’t Overcrowded.

We’ve been silently skeptical of claims that hedge funds will run out of ideas. The reason is that a hedge fund can technically do anything it wants. It doesn’t have to do traditonal long-short arbitrage, or whatever is considered standard….

When a prospective manager is looking for a prime broker, they all ask whether the strategy involves short selling.  They want to know how much and what type of stocks. Short selling is a profitable part of the business since the broker collects an interest rate on the stock sold and pays a fraction of that to the manager.

Hedge fund managers use strategies involving options.  We often have positions with a large short interest, hedged by call options.  Or we might have a basket of call options in favored sectors hedged by futures.  Those selling us the futures hedge their positions by selling stocks against them.

Briefly put, the movement of money to hedge fund managers has generated a lot more short selling than is apparent from the names of the fund.  It is much different from the era when long-only managers were the only choice for most investors.