Shorting is “Scarcely Worth the Bother”

A new study from a group of quants at the Netherlands-based firm Robeco—who examined the respective contributions to performance of both long and short equity positions—found that “the short position is scarcely worth the bother.” This according to a recent article in Bloomberg that characterizes the findings as an “academic wrecking ball.”

Shorting stock is defined as borrowing a security and then selling it— “meaning you make money if the price falls and you then re-buy it.” The article says that shorting can generate profits when markets go down as well as up. It outlines the main findings of the Robeco team research, the central thrust of which is represented in the following chart– which shows that “risk-adjusted returns turned out better in all cases for the long-only strategy.”

Other findings include:

  • “There are a number of different ways to spot a stock with a good chance to outperform, but stocks with a good chance to underperform look bad according to a number of different factors,” which suggests that there is “little point in using factors to identify individual stocks to short.”
  • The assumption behind the research of “zero friction”-that it is as cheap to maintain a short position as it is to maintain a long one–is a fallacy since selling short “requires paying interest to someone, and that interest will increase if the stock is a popular one  among short-sellers.”
  • Returns on a short position are “capped at 100% (if the stock goes to zero), while the potential losses are infinite. So, the balance is set against shorting even before starting,” the article argues.
  • Shorting stock requires a thick skin, the article contends, adding that “companies seldom complain about investors buying their stocks, but tend to get very vocal about being shorted.”
  • The research shows “that using factors to identify short candidates the same way that we identify stocks to buy isn’t a good way to deploy capital. For those who don’t want to expose themselves to the overall direction of the market, it is far cheaper and easier, and no less effective, just to take a short position in the index.”

The article concludes that the research “looks clear and persuasive” in its implication that “a lot of hedge funds and quants are wasting their time and money.”