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.
The Opalesque 2013 New York Roundtable also discussed:
Tax-efficient investing: How hedge fund investors can get the best after-tax returns
How “structural alpha” can preserve and even amplify returns
How to profit through post-reorganization and turnaround equities
What are the biggest opportunities in China and Latin America?
With the introduction of OTC clearing, a major challenge for the buy side is having to provide collateral for initial margin on a daily basis. How do the clearing houses help?
How fund administrators help smaller managers get off the ground and grow faster.
The Opalesque 2013 New York Roundtable was sponsored by Maples Fund Services, Eurex and Taussig Capital and took place November 12th with:
Bob Kim, Visium Funds
Ambrose Paxson, PING Capital
David Tawil, Maglan Capital
Jim Robinson, Middlebury Securities (representing Taussig Capital)
The Opalesque Roundtable Series offers unparalleled intelligence on the most important global hedge fund jurisdictions and their players. The Roundtable Series is a free publication from Opalesque and is continually updated. Please scroll down to view the full selection of our Roundtables - covering the globe!