US equity shorts deliver alpha
20 March 2020 New York
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The most shorted US equities have underperformed since the start of March, a tailwind for long-short equity funds in a challenging market environment, according to IHS Markit data.
The deepening sell-off in US equities has presented opportunities for long-short managers, with the most heavily shorted shares underperforming the broader market, says Sam Pierson, securities finance director at IHS Markit.
The trend can be observed across several traditional metrics for measuring short interest, Pierson notes, including cost-to-borrow, the percentage of outstanding shares on loan, and the percentage of lendable shares already on loan.
“Constituents within the energy sector have seen the largest decline in market valuation facing the dual threat of increasing supply and decreasing demand,” Pierson explains. “It is worth noting that the most shorted constituents in the sector have outperformed the rest of the sector; some of these less shorted constituents were already exhibiting distressed valuations coming into the broad market collapse, particularly firms with US shale exposure, suggesting broad selling of the sector by investors.”
The value of new shares short in the energy sector increased by less than $1 billion, while the total value of short positions has fallen by $10 billion, IHS Markit data shows.
The data analytics and financial services provider reveals that over February the exchange short interest increased by 5 percent on-for the largest US equities, compared to 3 percent for the rest of US equities.
Peirson says that this leads him to estimate that the largest US equities have seen a further 4 percent average increase in shares short in March, which alludes to an increase in broad hedging of market exposure, also seen in the increasing of short positions in exchange-traded funds.
The total value of the exchange short interest peaked on 15 January at $872 billion, before declining by 17 percent to $725 billion by 28 February.
IHS Markit estimates that the total short interest value declined to $648 billion as of 13 March, but the decreasing value of short positions being broadly like the year-to-date decline in market valuations suggests that there hasn’t been a substantial change in overall short positioning.
The deepening sell-off in US equities has presented opportunities for long-short managers, with the most heavily shorted shares underperforming the broader market, says Sam Pierson, securities finance director at IHS Markit.
The trend can be observed across several traditional metrics for measuring short interest, Pierson notes, including cost-to-borrow, the percentage of outstanding shares on loan, and the percentage of lendable shares already on loan.
“Constituents within the energy sector have seen the largest decline in market valuation facing the dual threat of increasing supply and decreasing demand,” Pierson explains. “It is worth noting that the most shorted constituents in the sector have outperformed the rest of the sector; some of these less shorted constituents were already exhibiting distressed valuations coming into the broad market collapse, particularly firms with US shale exposure, suggesting broad selling of the sector by investors.”
The value of new shares short in the energy sector increased by less than $1 billion, while the total value of short positions has fallen by $10 billion, IHS Markit data shows.
The data analytics and financial services provider reveals that over February the exchange short interest increased by 5 percent on-for the largest US equities, compared to 3 percent for the rest of US equities.
Peirson says that this leads him to estimate that the largest US equities have seen a further 4 percent average increase in shares short in March, which alludes to an increase in broad hedging of market exposure, also seen in the increasing of short positions in exchange-traded funds.
The total value of the exchange short interest peaked on 15 January at $872 billion, before declining by 17 percent to $725 billion by 28 February.
IHS Markit estimates that the total short interest value declined to $648 billion as of 13 March, but the decreasing value of short positions being broadly like the year-to-date decline in market valuations suggests that there hasn’t been a substantial change in overall short positioning.
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