The Occasional Charm of Short Sellers

Chidem Kurdas

Every once in a while, investors stampede to short sellers. This May was one of those rare times. According to Credit Suisse data, dedicated short bias managers had the largest inflows of all strategies, receiving in one month a 1.5% addition to their existing capital.

This happened while there was a net outflow of assets from several hedge fund segments including long/short equity and global macro.

This is an unusual occurrence. Much of the time, short sellers don’t make money and many investors treat them like pestilence. Very few short sellers survive over time.

Why did investors move to short sellers in May? It was an exceptionally turbulent month. The European crisis worsened; Chinese economic growth slowed; US recovery looked less robust than thought; stocks fell worldwide. It was just the kind of environment where a competent short seller will reap high returns.

Indeed, the dedicated short bias portion of the Dow Jones Credit Suisse Hedge Fund Index gained more than 9% in May. But it is in the red year-to-date, down by 7.6%.

Of course, to get the positive 9% you had to be in short strategies already. As usual, some investors chasing returns entered after the peak and are in danger of exiting at a low point.  This has been called rearview-mirror investing. Publications documenting the losses to investors from such behavior may have consumed whole forests, but it remains common.

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