IHS Markit: Shorted US equities deliver alpha in October
07 November 2018 New York
Image: Shutterstock
This October has been the best month of the year so far for short interest, according to Samuel Pierson, director at IHS Markit.
In an article, recently published by IHS Markit, Pierson indicated “after a challenging spring and summer for short sellers, the return of alpha in the short interest factors in September and October has been most welcome”.
October delivered the largest relative return for shorting the most shorted stocks since October 2017, which was itself the best return since the October proceeding the 2016 election, Pierson stated.
Concerning these results, Pierson said: “That is exactly when short alpha is most crucial, providing long-short portfolio managers with income and the opportunity to add to long positions in a sell-off.”
The -12.3 percent average return for the most shorted stocks is the lowest absolute return since January of 2016, when the most shorted returned -13.8 percent.
He added: “Both events in 2016 were followed shortly thereafter by significant pain for short sellers, with February, March and November of 2016 seeing significant outperformance of the most shorted US equities.”
“While we’re only two trading days into November, the pattern appears to be repeating, with the most shorted stocks up an average of 4.3 percent while the least shorted have only returned 1.6 percent.”
The most shorted stocks saw less of an increase in shorting on average, though Pierson explained “that likely stems from a combination of reticence toward shorting heavily shorted stocks at the lows, combined with challenges in sourcing additional borrows for the more crowded stocks”.
While overall short balances were down, there was an uptick in borrow costs, driving a small increase in borrows with a balance greater than 500bps, which had previously been trending down all year.
The balances increased from $5.4billion in September to $6.3 billion in October, the highest level since July.
Pierson also found demand for warm stocks declined in October, but that came largely as the result of activity in Tesla, where balances declined in the early part of the month and the fee moved below the threshold toward the end of the month.
He concluded: “It has been a solid couple of months for US equity short sellers, after a brutal run this summer, specifically in early June and August.”
“Short sellers did not increase positions by enough to offset the decline in market valuations, however, there was a selective addition to some positions amid a volatile earnings season.”
In an article, recently published by IHS Markit, Pierson indicated “after a challenging spring and summer for short sellers, the return of alpha in the short interest factors in September and October has been most welcome”.
October delivered the largest relative return for shorting the most shorted stocks since October 2017, which was itself the best return since the October proceeding the 2016 election, Pierson stated.
Concerning these results, Pierson said: “That is exactly when short alpha is most crucial, providing long-short portfolio managers with income and the opportunity to add to long positions in a sell-off.”
The -12.3 percent average return for the most shorted stocks is the lowest absolute return since January of 2016, when the most shorted returned -13.8 percent.
He added: “Both events in 2016 were followed shortly thereafter by significant pain for short sellers, with February, March and November of 2016 seeing significant outperformance of the most shorted US equities.”
“While we’re only two trading days into November, the pattern appears to be repeating, with the most shorted stocks up an average of 4.3 percent while the least shorted have only returned 1.6 percent.”
The most shorted stocks saw less of an increase in shorting on average, though Pierson explained “that likely stems from a combination of reticence toward shorting heavily shorted stocks at the lows, combined with challenges in sourcing additional borrows for the more crowded stocks”.
While overall short balances were down, there was an uptick in borrow costs, driving a small increase in borrows with a balance greater than 500bps, which had previously been trending down all year.
The balances increased from $5.4billion in September to $6.3 billion in October, the highest level since July.
Pierson also found demand for warm stocks declined in October, but that came largely as the result of activity in Tesla, where balances declined in the early part of the month and the fee moved below the threshold toward the end of the month.
He concluded: “It has been a solid couple of months for US equity short sellers, after a brutal run this summer, specifically in early June and August.”
“Short sellers did not increase positions by enough to offset the decline in market valuations, however, there was a selective addition to some positions amid a volatile earnings season.”
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