Short sellers: If you can’t beat them join them
Like it or not, short sellers are part of how our market works and even play a role in keeping the worst excesses in check.
You may not like it. You may think of these shorting funds as rapacious, as bullies, as the very opposite of what building a business is about. But if you are working, then you will have super — and the chances are your super funds makes money as a supplier of stock to these short funds.
In fact, a growing number of the best funds now run what are called long/short funds — that means they do shorting as a sideline to top-up returns or exploit situations where they believe a stock is about to drop in price.
If you are an investor you may have investments in long-short funds, if you don’t, there is a strong argument that you should.
Two parallel developments in recent weeks prove the point. A high profile alternative investment company called Blue Sky Ltd has come under what they call a ‘short attack’. A US fund has called out the Brisbane group for over-estimating its assets and consequently overcharging fees. The Blue Sky share price is now down a whopping 65 per cent or so and the company itself has since lost its CEO.
At the other end of the spectrum, L1 Capital, a Melbourne-based investment company has just gone to the sharemarket with an ambitious capital raising. L1 is best known for running a long-short fund which has returned 35 per cent a year. The group aimed to raise $500m with its float, it received more than $1 billion.
Shorting is a brutal business — if they get it right they win big time, if they get it wrong they lose big time because they operate on borrowed stock. (How it works — 1,000 shares are borrowed at, say, $100 each at a total cost of $100,000 and then they are immediately sold. If the stock falls to, say, $50 — the 1,000 shares are returned by buying the shares again at the lower price — total cost of 1,000 shares is now $50,000 — and $50,000 is kept as profit).
Shorting is not new. It goes back to the colourful investor Jesse Livermore — the great bear of Wall Street — who was shorting big time back in 1929 and made an estimated billion dollars in today’s money. A decade later he committed suicide shooting himself in the Sherry Netherland hotel in New York in 1940.
Today shorting is part of how our market works — at best it cleans out the worst excesses at companies that have been getting away with misleading actions of some kind and, what’s more, virtually everyone has a finger in the pie, like it or not.
More Coverage
Are ETFs behind Commonwealth Bank’s record run?
Investors have rushed into passive exchange-traded funds, which perfectly match market moves. But are the funds themselves changing the sharemarket?
The winners and losers from new superannuation rules
There’s good and bad in this week’s suite of superannuation rule changes that came into force from July 1 | Here’s what to do about them.
One of the most resilient brands in the retail sector, JB Hi-Fi, finally buckled this week — it issued a profit downgrade, the shares fell 10 per cent immediately and the short sellers threw another party. The consumer electronics group had been among the top ten most shorted stocks all year.