Shorting. What Is It Good For?

The following is a guest post from Eric Fernandez, CFA of Two Rivers Analytics.

The S&P is at record highs yet again. Shorting has been difficult for the past several years as equities have continued their ascent.  More than a handful of well-regarded short-biased funds have closed their doors since 2014.  You could be forgiven for asking what shorting is good for.

Don’t short-change shorting

The top three reasons institutions invest in hedge funds, according to Prequin’s Global Hedge Fund Report, are:

1. to seek uncorrelated returns (59%);
2. to seek higher risk-adjusted returns (56%); and
3. to reduce portfolio volatility (46%).

Surprisingly, just seven percent (7%) of investors are looking for the highest returns.

Yet, in a counter-intuitive outcome, shorting adds value even when it produces negative stand-alone returns.  Why?  Because...