Short fireworks

Looking back at my short tipping exercise from February this year, the results are remarkable:

Stock Symbol Performance Feb 2 to Dec 12
Globo GBO -27%
Quindell QPP -91%
Wandisco GBL -69%
Naibu NBU -79%
Judge Scientific JDG -48%
Mean -63%

So that’s a full hit, every stock in the set declined markedly and £100 invested equal weighted in this short portfolio would have returned £63 profit in less than a year. Unfortunately shorting is a pain due to the unlimited downside if you get it wrong, and I haven’t actually shorted anything. I did get the time frame wrong, given that we didn’t have to wait for 2016 to see results. In a real portfolio I would have probably exited all the positions by now, except perhaps Globo which may have some more downwards potential.

Fireworks

Fireworks (credit: Maciej Lewandowski on Flickr)

The small cap markets are missing an instrument for limited risk shorting, for instance put options, perhaps with fewer strikes than normal options  — e.g. a logarithmic ladder —  and fewer expiries — quarterlies would be more than frequent enough. It could be either something tradable like certificates or spread bets, or as an OTC keep-to-maturity product. The market for this is small but a niche operator could do well. They could hedge by selling discounted call spreads (calls with truncated upside at the put strike) to bulls to match their put portfolio with a small amount of capital needed to market make the inventory. With the right risk management this is a low risk business that can be operated with no price risk, and it would offer a more useful service than open ended spread betting. Shorting is essential to functional markets.

That said there are some mitigating factors: it has been a bear market for small caps, during which basket cases often don’t do well. They can conversely do spectacularly, for a while, during bull markets, which can be quite testing for shorters. That said the iShares MSCI UK Small Cap ETF, as a proxy for the market, is flat on that same period so a hedged long/short portfolio would have returned about the same. That hedge may not work fully in case of a short squeeze or bullish market where the basket cases race far ahead.

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