A Short-Selling Lesson from SAC

Dasan was one of the original members of the financial Twitter gang and had also been one of the better early investment bloggers. He doesn’t write very often these days but when he does it’s typically because he has something insightful to pass along.

Back in the day, Dasan had spent a bunch of time with portfolio managers from SAC Capital during the interview process. While he didn’t end up joining the firm, he did come away with several important notions about running money like a hedge fund.

Here is one of those lessons, on the right and wrong ways to utilize the short-selling toolkit:

4. SHORTING INDICES.  Many fund managers think they are great stock pickers.  Actually, we all do, by definition, because we are charging people for our great skills- otherwise they could cheaply invest in an unmanaged index.  But these same managers decide they will pick the longs in the fund and then use an ETF to short against the longs, as a “hedge.”  WTF kind of backward thinking is this?  So you can pick what stocks will go up, and not the stocks that can go down?  Does this make any sense?  Then the clever among this group will argue with you that because the market goes up over time, it’s important to spend time on longs and “hedges always lose money.”  NONSENSE.  Even in a bull market there are stocks that are going down. (Do you need examples?  IBM, “Big Blue,” the bluest of the blue chip techs,  is down 8.5% as I write this, versus the NASDAQ up 33% for the year.) I’ll tell you what- if you want to play with indices, and you tell me the market goes up most of the time, I will suggest that you LONG the index and spend all your time finding individual name shorts instead.  Did your brain just blow a fuse?  Let me suggest the best approach and that is pick longs and shorts and never short an index.  If you don’t have enough shorts, because “Shorting is hard” and all that, then go re-read RULE NUMBER ONE.

The above-referenced RULE NUMBER ONE and the rest of his takeaways can be found at the author’s blog, linked below.

Source:

Idea Velocity, what I learned from SAC (Dasan)