Looking back at my short tipping exercise from February this year, the results are remarkable:
|Stock||Symbol||Performance Feb 2 to Dec 12|
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.
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.