Environment for long-short equity improves in Q4
19 December 2018 Massachusetts
Image: Shutterstock
With positive returns to momentum and short interest factors, along with the rebate tailwind, the environment for long-short equity has improved in Q4, according to Sam Pierson, director of securities finance at IHS Markit.
Short positions in EU peaked in May and have steadily declined since. Pierson explained that this wasn’t just the result of declining share prices, the percentage of total EU market cap short also declined during that time.
Pierson noted that the UK equity marked helped drive that trend, with reduced short positioning in recent months.
This suggested that Brexit uncertainty has scared off investors on both long and short side with the Financial Times Stock Exchange 250 hitting a year-to-date low on 10 December despite short covering, Pierson revealed.
He highlighted that EU equities are “catching-down” to EM equity year-to-date (YTD) performance, though an increase in demand from short sellers remains to be seen.
US equities have presented opportunities for short sellers this year although much of that opportunity has come in the last four months of the year.
Pierson said: “The most shorted US equities, rebalanced monthly, outperformed the least shorted stocks by 10 percent over the first eight months of 2018.”
“June was particularly challenging, with momentum and short interest both delivering negative returns. September was the best month of the year for US equity shorts thus far, with November seeing slightly negative returns ahead of the positive month-to-date (MTD) returns in December.”
Meanwhile, Asia has been a fertile ground for short selling this year, particularly in the emerging markets, Pierson noted.
October was the best month of the year so far, with the most shorted stocks in Asia ex-Japan declining by 13.6 percent, and the least shorted stocks declining by -7.4 percent, according to Pierson.
Pierson cited: “The 6.2 percent relative underperformance was the most since July 2012, when the performance gap between most and least shorted was 6.9 percent. Short sellers pressed their winners and increased positions in the most shorted stocks by 0.35 percent of shares outstanding on average.”
“Then came November, the worst month of the year for Asia shorts, with the most shorted stocks surging by more than 5 percent on average, while the least shorted stocks only by 0.25 percent. December has presented a return of alpha for short sellers, with the most shorted equities in the region underperforming the least shorted by 3.4 percent MTD.”
Summarising the commentary, Pierson said: “It has been an up-and-down year for equity short sellers; seeing further inconsistent returns coinciding with increased volatility in Q4. In the US and Asia equity markets, October delivered 2018’s largest monthly returns for the IHS Markit Short Interest factor, which ranks stocks by borrowed shares as a percentage of shares outstanding.”
He added: “While the October returns for the short interest factor were particularly strong, they did coincide with sharply negative returns for momentum factors. Using 12-month momentum with a one-month lag, both developed and emerging markets saw the worst returns of 2018 in October.”
Short positions in EU peaked in May and have steadily declined since. Pierson explained that this wasn’t just the result of declining share prices, the percentage of total EU market cap short also declined during that time.
Pierson noted that the UK equity marked helped drive that trend, with reduced short positioning in recent months.
This suggested that Brexit uncertainty has scared off investors on both long and short side with the Financial Times Stock Exchange 250 hitting a year-to-date low on 10 December despite short covering, Pierson revealed.
He highlighted that EU equities are “catching-down” to EM equity year-to-date (YTD) performance, though an increase in demand from short sellers remains to be seen.
US equities have presented opportunities for short sellers this year although much of that opportunity has come in the last four months of the year.
Pierson said: “The most shorted US equities, rebalanced monthly, outperformed the least shorted stocks by 10 percent over the first eight months of 2018.”
“June was particularly challenging, with momentum and short interest both delivering negative returns. September was the best month of the year for US equity shorts thus far, with November seeing slightly negative returns ahead of the positive month-to-date (MTD) returns in December.”
Meanwhile, Asia has been a fertile ground for short selling this year, particularly in the emerging markets, Pierson noted.
October was the best month of the year so far, with the most shorted stocks in Asia ex-Japan declining by 13.6 percent, and the least shorted stocks declining by -7.4 percent, according to Pierson.
Pierson cited: “The 6.2 percent relative underperformance was the most since July 2012, when the performance gap between most and least shorted was 6.9 percent. Short sellers pressed their winners and increased positions in the most shorted stocks by 0.35 percent of shares outstanding on average.”
“Then came November, the worst month of the year for Asia shorts, with the most shorted stocks surging by more than 5 percent on average, while the least shorted stocks only by 0.25 percent. December has presented a return of alpha for short sellers, with the most shorted equities in the region underperforming the least shorted by 3.4 percent MTD.”
Summarising the commentary, Pierson said: “It has been an up-and-down year for equity short sellers; seeing further inconsistent returns coinciding with increased volatility in Q4. In the US and Asia equity markets, October delivered 2018’s largest monthly returns for the IHS Markit Short Interest factor, which ranks stocks by borrowed shares as a percentage of shares outstanding.”
He added: “While the October returns for the short interest factor were particularly strong, they did coincide with sharply negative returns for momentum factors. Using 12-month momentum with a one-month lag, both developed and emerging markets saw the worst returns of 2018 in October.”
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