CASLA: Shorting is more of an art than a science
31 May 2019 Toronto
Image: Shutterstock
Shorting is more of an art than a science, according to one speaker at the Canadian Securities Lending Association (CASLA) conference.
The speaker suggested that shorting is more of a thesis. They said: “Your initial thesis might be blown, and so re-evaluating your thesis is very important.”
The moderator commented: “When I think about shorting, it is incredibly difficult and there are lots of challenges to it, how do you establish a thesis around it and how do you execute it?”
In response, one speaker explained: “We look for red flags—for example, bank statements—and we take these we look deeper into them. A big part of what we look for on the short side is high yields.”
The moderator asked panellists if they had spoken to a management team with the preconceived notion that you want to short them.
One panellist replied: “Interviewing the management teams is a key part of our process. Questions, for example, include ‘if you could only sell through one product what would it be?’.”
They explained: “Questions like this to help probe thinking better. You don’t become a CEO unless you’re an excellent sales person, people will tell you the most optimistic perspective on it. It is about getting them to tell the full story, such as a series of interviews.”
In terms of how they find those red flags, one speaker said: “To find those red flags we look at past records, reputation, and it is all rooted in publicly available information. We also talk with people in the industry and network.”
The moderator also asked panellist that when a red flag company is found and you have agreed it’s a good opportunity, but given history and behaviours, is backing out an option.
One speaker on the panel affirmed: “The way that we conduct ourselves is by being convinced we are doing the right thing; we are not in the business with falsifying information so we are usually comfortable that we have the right information.”
The panel also discussed macroeconomics, and one speaker highlighted: “[The industry] spend a lot of time thinking about the macroeconomic backdrop. If the equity market decides to peel off 20 percent, then fear ripples.”
“If we look at this year, there are several pillars as to why we have had a good run, and one is that the US Federal Reserve stopped hiking as they made clear that hikes were far too high—so that is a risk eliminated.”
“In the latter half of last year, and in the early part of this year we saw signs of stabilisation, so there was a thought that the worst was behind us.”
They continued: “A big factor was that China and the US were in trade talks and people thought the deal would be done, with no further tariffs. That fuelled the rally risk asset.”
“In the last few weeks, we have seen that the negotiations between the US and China are not going well and the markets need to re-adjust.”
Another speaker added: “We are in this trade war process and it has been surprisingly calmer than it has been in the past.”
“The US is attempting to remain the number one superpower in the world. In my mind, I don’t think a deal will be easily reached and I am incorporating a fairly defensive posture in my business.”
The speaker suggested that shorting is more of a thesis. They said: “Your initial thesis might be blown, and so re-evaluating your thesis is very important.”
The moderator commented: “When I think about shorting, it is incredibly difficult and there are lots of challenges to it, how do you establish a thesis around it and how do you execute it?”
In response, one speaker explained: “We look for red flags—for example, bank statements—and we take these we look deeper into them. A big part of what we look for on the short side is high yields.”
The moderator asked panellists if they had spoken to a management team with the preconceived notion that you want to short them.
One panellist replied: “Interviewing the management teams is a key part of our process. Questions, for example, include ‘if you could only sell through one product what would it be?’.”
They explained: “Questions like this to help probe thinking better. You don’t become a CEO unless you’re an excellent sales person, people will tell you the most optimistic perspective on it. It is about getting them to tell the full story, such as a series of interviews.”
In terms of how they find those red flags, one speaker said: “To find those red flags we look at past records, reputation, and it is all rooted in publicly available information. We also talk with people in the industry and network.”
The moderator also asked panellist that when a red flag company is found and you have agreed it’s a good opportunity, but given history and behaviours, is backing out an option.
One speaker on the panel affirmed: “The way that we conduct ourselves is by being convinced we are doing the right thing; we are not in the business with falsifying information so we are usually comfortable that we have the right information.”
The panel also discussed macroeconomics, and one speaker highlighted: “[The industry] spend a lot of time thinking about the macroeconomic backdrop. If the equity market decides to peel off 20 percent, then fear ripples.”
“If we look at this year, there are several pillars as to why we have had a good run, and one is that the US Federal Reserve stopped hiking as they made clear that hikes were far too high—so that is a risk eliminated.”
“In the latter half of last year, and in the early part of this year we saw signs of stabilisation, so there was a thought that the worst was behind us.”
They continued: “A big factor was that China and the US were in trade talks and people thought the deal would be done, with no further tariffs. That fuelled the rally risk asset.”
“In the last few weeks, we have seen that the negotiations between the US and China are not going well and the markets need to re-adjust.”
Another speaker added: “We are in this trade war process and it has been surprisingly calmer than it has been in the past.”
“The US is attempting to remain the number one superpower in the world. In my mind, I don’t think a deal will be easily reached and I am incorporating a fairly defensive posture in my business.”
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