By Rodrigo Campos and Sam Forgione
NEW YORK Jan 20 After years of hiding under
their desks, short sellers are re-emerging - slowly.
Investors who make a living betting that stock prices will
fall are happy to forget 2013: The S&P 500 gained nearly
30 percent while Credit Suisse's index of hedge funds with a
dedicated short bias lost 25 percent.
Buying the most heavily shorted stocks was a much better bet
than the S&P 500: A list of top shorted stocks from SunGard's
Astec Analytics beat the S&P 500 by 26 percentage points on
average last year.
But with the Federal Reserve beginning to cut back on its
bond buying - in a withdrawal of the stimulus that underpinned
the rally - there's hope for short sellers in 2014.
Jim Chanos, president and founder of Kynikos Associates and
one of the most prominent short sellers, said the market is
primed for people like him and as a result he has gone out to
"Now I think is not a bad time to be raising capital for
what we do. When we got a rough going in the mid-90s, that was
exactly the time to raise capital," Chanos said, adding it was
better to do this when critics viewed him as "like the village
idiot and not an evil genius."
Already, there are signs 2014 may be different. Stocks
haven't been rising as a herd in the way they did in 2013, and
some of last year's high-profile winners are being re-examined.
Electronics retailer Best Buy Co shares suffered
their worst day in 11 years on Thursday, falling almost 30
percent after disappointing sales undermined the bullish thesis
that helped the stock triple in 2013. It fell further on Friday.
The 50-day rolling correlation between the S&P 500 and its
components peaked last year in May at 0.73, soon after Fed
Chairman Ben Bernanke first broached winding down the stimulus.
It dropped to 0.5 in October before bouncing back late in
the year, but has since resumed its decline after the Fed
announced cuts to its monthly bond buying, according to data
from Bespoke Investment Group, a financial research firm based
in Harrison, New York.
Bill Fleckenstein, president at Fleckenstein Capital Inc in
Seattle, a notable short-seller who closed his short fund around
the time the market bottomed in 2009, said he was about to start
the process of raising money for a new short fund.
"We're about done with the document and I'll be marketing it
officially very shortly, like within a week," he said.
That's not to say he is brimming with confidence - not yet.
"It's dangerous to be short still, but we might be building
toward a moment - whether it's two weeks from now or 10 months
from now I don't know, where the market becomes quite
vulnerable," said Fleckenstein.
Don Steinbrugge, chairman of Agecroft Partners, a global
consulting and third party marketing firm for hedge funds, said
"long/short" equity - a strategy betting both on and against
stocks - will see the most demand among all hedge fund
strategies this year.
Long/short equity represented more than 40 percent of the
hedge fund industry assets before 2008. The sector then
experienced large outflows to other hedge fund strategies
including commodity trading advisers (CTAs) and various fixed
Its market share of industry assets bottomed out at
approximately 25 percent in the beginning of 2013.
"Last year saw this trend reverse, and we expect very high
demand for long/short equity in 2014," Steinbrugge said.
In fact, 2013 saw record inflows to long/short funds of more
than $20.5 billion, up from $5.7 billion in 2012, according to
data compiled by Morningstar.
Neuberger Berman Group LLC is taking advantage of the
environment. The New York-based investment firm recently
launched its second mutual fund that employs external hedge fund
managers to manage its assets. The Neuberger Berman Long Short
Multi-Manager Fund will employ the "long/short" strategy.
Long/short funds are slowly shifting toward the short side,
though for now they're still aligned bullishly.
Their long/short ratio sits at 55 percent, according to
Credit Suisse, down modestly from the beginning of the year.
They had built short positions late in 2013 and the ratio did
fall to about 47 to 48 percent in mid-November, until the
year-end rally caused hedge funds to cover those positions.
UNDER THE MICROSCOPE
In the last week, S&P 500 companies that have seen the
biggest increase in shares borrowed for short bets according to
Markit include Borgwarner, BB&T Corp, and Best
Buy, all of which recently touched 52-week highs.
Internet retailers TripAdvisor Inc and Expedia Inc
, big winners in 2013, have seen an uptick in interest
"There's growing interest on (shorting) a number of stocks,
concentrated in areas that did well last year," said Brian
Jacobsen, chief portfolio strategist at Wells Fargo Funds
Management in Menomonee Falls, Wisconsin.
In 2013, just one of Astec Analytics' 10 most shorted stocks
of the year made it to Markit's list of top 20 performing North
American shorts - department store group J.C. Penney.
Still, going short Penney, whose sales collapsed after bad
missteps by management, was enough for some.
Suvretta Capital Management, founded by a former portfolio
manager for top investors George Soros and Steven A. Cohen, told
clients this week its bet against Penney shares helped
contribute to solid returns for its long/short strategy in the
last two years.
"On the short side, we have now generated profits three
times (generating a total return of approximately 130 percent)
in the past two years with our J.C. Penney positions," Suvretta
Chief Investment Officer Aaron Cowen said in a client letter
obtained by Reuters.
Ariad Pharma and Aveo Pharma, down 64
percent and 77 percent last year, respectively, were also among
the few bets that worked for short sellers in 2013. Some see
more opportunities in the sector.
"Biotech is in full bubble mode, meaning companies that have
no prospects of a drug continue to grind higher," said John
Hempton, chief investment officer and founder of Bronte Capital,
a Sydney, Australia-based asset management firm that often takes
Short sellers say they believe bulls may be getting too
confident. The S&P 500's forward price-to-earnings ratio is at
its highest since mid-2007.
Goldman Sachs, in a recent note, expressed concern that
investors expect P/E multiples to continue to expand to a level
that would match the 1997-2000 technology bubble.
"Short selling over the last two years has been a hedge
against profits," said Douglas Kass of hedge fund Seabreeze
Partners Management Inc. But he said recent disappointments from
companies as varied as Ford, Intel, and Elizabeth Arden are
signs that the "tide might be turning."