Why the short side may soon work again - Opalesque NY Roundtable
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So far in 2013, the short side has caused a lot of frustration for long/short managers. With the markets going straight up, not only has shorting not worked, the top 50 most shorted stocks in the S&P 500 have actually outperformed the S&P by 20% this year. These things typically happen in a market beta rally where typically all junk stocks rally. That, by the way, also explains why the average equity long/short fund is up only about 8% for the year net, so much less than the S&P.
Visium Asset Management did a study on this phenomenon, looking back at the last 25 years across multiple cycles in a 12 month time period. When the most shorted stocks outperform by this much, then typically they start to mean revert drastically. This could be a very opportune time for the short side, and for hedge funds generally.
Investing in peer to peer and online lending
Increased regulation will not dampen but further fuel the growth of alternative and online lending industries. New players have launched funds which pioneered the use of leverage and securitization in a peer-to-peer lending asset class. Five to seven years ago, it wasn't thought possible for an institutional investor to assemble a portfolio north of $100m or more in small balance loans. However, technological changes over the last few years have made it possible to originate and acquire these loans in a very cost effective manner. The traditional, bricks-and-mortar banking cost structure requires institutions to spend 5% to 7% of the principal balance of the loan in origination – general overhead, regulatory, and other costs. The online lending industry can originate loans for less than 2%, so, effectively, there is an arbitrage built into this asset class that is reminiscent of many other credit categories that over the years have been disintermediated.
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