From 1983–2006 the Russell 3000 index (which accounts for 98% of US stock liquidity) was up nearly 900%, however:
- 39% of stocks were unprofitable investments
- 64% of stocks under-performed the index
- 19% of investments declined by 75% or more
- 25% of the stocks accounted for 100% of the returns of the index
Conclusion: Even in a bull market, there are fantastic opportunities to short.
Summary of Strategy
The Active Bear Strategy manages a calculated approach to short selling securities which is unique to other short sellers:
The traditional short seller model of “frauds, fads, and business failures” is fraught with risk. Frequently, positions for short sellers are established in high short interest securities, which is expensive to fund in an era of negative rebates. This approach also increases volatility and “squeeze” risk. As a result, the equity curve of most short sellers features sharp peaks and valleys with inconsistent results.
Conversely, The Active Bear Strategy seeks to identify lower short interest securities that may under-perform due to an earnings driven event. Specifically, we use a company's balance sheet, cash flow statement, and income statement, as well as the notes to the financial statements, in order to assess the quality and sustainability of the company's reported financial results.
The portfolio consists of 20-50 positions, which generally range in size from 2 to 7%. Though the strategy is short-only, the investment team also considers market direction and other factors. Accordingly, as the team becomes bullish, with the understanding that we have to be short stock, the portfolio managers will make tactical adjustments to the portfolio by seeking short positions which they believe will underperform during a bull market.
At market bottoms, the strategy may be short high quality companies in the market. These companies will still have earnings quality issues; however, if the market appreciates, the portfolio managers believe these securities will not appreciate as much the market in general.
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