A new study shows that activist short sellers, a collection of hedge funds and more private research groups, returned 12.5 percent of alpha in the past year and a half.
Measuring alpha contribution through activist short sellers
An investing model that follows Activist Shorts Research created a simple strategy to replicate the public trades of following the top 28 activist shorts to measure the alpha contribution. This is significant, particularly as many traditional hedge funds lose on the short end of their relative value trades. The long bias in these funds, typically near 80%, has been the primary alpha contributor while the short side has typically been a drag on profits.
Study author Adam Kommel says the alpha contribution of the short selling specialists is significant, but it doesn’t surprise because “short-sellers are woefully underfollowed,” he said in an interview.
Behind the scenes speculation is that the activist strategy is becoming a crowded trade and opportunities are becoming more difficult to find. This may be true of the buy and go long crowd, but not for activists such as Gotham Research. This group uses often aggressive fraud detection methods with equally effective media campaigns to bring ruin on firms they have “short sold,” betting on a price decline.
Post-2013 activist short-seller returns
Kommel says the outperformance of short sellers is not temporary. “Short-seller returns were even better in the Chinese reverse merger fraud heyday of 2010-2012,” he humorously noted.
The top performing short sellers generated campaign return averages ranging from 62.8 percent, at Alfred Little, the little known top performer in the short selling space. Well known performers in the top ten of returns included the celebrated Gotham City Research at 48.7 percent, GeoInvesting, Pershing Square, Kerrisdale. Muddy Waters and Bronte Capital fell just under the top ten, both with performance near 20 percent.
Greenlight Capital, among the biggest names, has been having trouble, as his shorts are upside-down to the tune of 23.2 percent, according to the research that dates back only to January of 2013. Kynikos Associates Jim Chanos, who has long been waiting for a Chinese correction as reported in ValueWalk, has only generated a 1.5 percent return on his short positions.
Kommel says that, despite all the recent attention, “if anything, the period since 2013 has been rough for short-sellers.”
Below is the full release from ActivistShorts.com
Alfred Little and Gotham City Research lead inaugural short-seller rankings
Study shows following short-sellers produces 12.5 percentage points of alpha
New York – August 5, 2014
Today, Activist Shorts Research released the first ranking of activist short-sellers, comparing 28 top short-sellers by their average campaign-length return and average one-week return. We also find that a simple strategy of following activist short-seller campaigns since 1-1-2013, with a one-week lag, produced alpha of 12.5 percentage points.
Alfred Little took the top spot for average campaign-length return, with its 15 targeted companies seeing an average return of -63% from campaign announcement to end date (usually defined as one year from last short-seller comment). Gotham City Research had the best one-week return average, with its five targeted companies seeing an average return of -31% in the week following campaign announcement.
Pershing Square was the top registered investment adviser in the campaign-length return ranking, with a -43% return to its eight targeted companies. The other six RIA’s represented are Bronte Capital, Greenlight Capital, Kerrisdale Capital, Kynikos Associates, Lakewood Capital and Whitney Tilson (of Kase Capital and T2 Partners).
The full chart as of the 8-4-2014 close is available below, and subscribers can view a daily-updated table at activistshorts.com/short_sellers/top. Since returns are from the company’s perspective here, a negative return is good for the short-seller.
To generate more actionable rankings, we re-ran the rankings to include only campaigns announced since 1-1-2013, and we excluded campaigns at stocks trading primarily over the counter (as those are significantly more difficult to short). Only short-sellers with at least three matching campaigns are included in the below table, so some of the short-sellers in the above table are excluded.
The resulting rankings give runaway victories to Gotham City Research on both campaign-length and one-week returns. Among RIA’s, Kerrisdale Capital and Whitney Tilson led with -9% and -7% campaign-length returns, despite a rising market. Famed short-seller Kynikos Associates actually saw a +5% return for its eight campaigns, despite a -4% average one-week return.
We can take this study one step further, though, and calculate the alpha generated by following short-sellers by shorting targeted stocks one week after campaign announcement and holding through the close of the campaign (“follower return”). Our results show that following short-seller campaigns since 1-1-2013 has produced returns of 1.1% to the short-seller and alpha of 12.5% compared to the average S&P 500 return during the same period. Thus, it appears that despite a historically difficult period for short-sellers, activist short-sellers have nevertheless seen much success.
The “all-time” ranking includes all campaigns by short-sellers with at least one campaign that was active within the last 12 months. The short-seller must also have at least three campaigns in the database (any time period). Full history is not tracked for Richard Pearson, Street Sweeper, Citron Research, Kynikos Associates, Whitney Tilson, Bronte Capital and Matt Berry.
The post-2013 table includes only campaigns announced since 1-1-2013 and excludes OTC listings. We used 1-1-2013 because it is the date our full coverage of all activist short-seller campaigns begins; the study would be subject to selection bias if we used a longer time frame.
The follower returns data includes campaigns announced between 1-1-2013 and 7-27-2014, and it excludes OTC listings. We also made a few other small modifications to this dataset to account for halted stocks; for more information, please request the underlying Excel data. The average length of campaigns included in the follower returns data set was 240 days, as the majority of included campaigns are still open.
Returns are total return figures with dividends re-invested at ex-dividend date. Borrow costs are not factored into returns.