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Alpha Theory Blog - News and Insights

« May 2020 | Main | July 2020 »

1 posts from June 2020

June 19, 2020

The Short End of the Stick

 

Over the years, we have consistently heard that the short portion of clients’ portfolios have been a major drag on returns. The problem is that when we do portfolio performance reviews with our clients we see that the short book, which is consistently negative, is generally less negative than the S&P 500 and MSCI World.

 

To explore this further, we wanted to test a simple strategy of creating an aggregated portfolio of client short positions to see how they performed against the major indices. The absolute result was an average annualized loss of -4.02% which confirms the industry dogma that the short book is a drag. That being said, the short portfolios provided consistent positive alpha (short book return minus negative index return).

 

Short_end

Source: Omega Point

 

The total return for clients’ short portfolio is -23.74% over the 5+ year period or an annualized return of -4.02%. This compares to a 10.20% annualized return for the S&P 500 or 6.16% annualized alpha and 6.35% for MSCI World or 2.33% annualized alpha. If we take the midpoint, that is roughly 4% of annualized alpha that our clients have generated per year for over 5 years.

 

Breaking it down by year, the alpha contribution was consistent except for 2016 where it was roughly breakeven showing that Alpha Theory managers were dependable alpha generators on the short-side.

 

Screen Shot 2020-06-19 at 11.21.34 AM

 

The sustained positive trend of the overall market over the years makes it almost impossible to create absolute returns from shorting. However, for investors looking to generate a less volatile stream of returns, a short book that has a negative correlation with the long book and provides consistent alpha is extremely valuable. Alpha Theory’s clients are consistent short alpha contributors. This is, of course, because of their stock selection skill but I would posit that their process discipline is just as important and is one of the reasons their alpha returns have been so consistent.