8 ms·

Short Selling Is Tough Business

84 points by hyperpape 8y ago

AznHisoka 8y ago
"The obvious lesson is: Don’t put all your money in a short-selling fund. (Not investing advice.)" Why do people always say "You should/shouldn't do X, Y, and Z. But this isn't investing advice"? It's obviously written as investing advice. What else is it? Life advice? Casual advice? If it's not investing advice, don't make such an authoritative claim.
- deleted 8y ago
  [deleted]
- rootusrootus 8y ago
  Because if you are in a position where you might plausibly give investment advice, and you make a statement that could conceivably be construed as investment advice by the authorities, you may find yourself running afoul of the law. So just like a lawyer making comments about legal choices, you make it explicit that you're not acting as a professional advisor.
  - mehrdadn 8y ago
    Is there any precedent for this kind of short disclaimer saving someone's legal rear as a defense?
    - mikestew 8y ago
      In order for there to be a history, there would first be a few obstacles to get over: "What are you, stupid? I said it wasn't investment advice. Sue if you want, good luck finding a lawyer to take the case." Okay, potential plaintiff found a lawyer who will take the case. It would still need to go before a judge who didn't immediately laugh it out of the court room. After all that, then you might find a court case recorded somewhere. Let us know what you find.
    - noonespecial 8y ago
      It might work more like a fence. It's hard for me to get a count of how many not-dogs are in my yard right now that my fence successfully kept out.
    - lloyd-christmas 8y ago
      I'm not sure of any precedent, but the disclaimer isn't just a "don't hold me to it" liability insurance. There are certain certifications required related to various types of products and recommendations (primarily Series 6, 7, 65, and 66). If they don't have that certification and act in that role, it's not just oops-you-can-sue-me liability, it's an actual possibility of jail time.
  - Y_Y 8y ago
    I am your lawyer and investment advisor, and this is legal and investment and skincare advice. Short APPL, pay your taxes, wear sunscreen.
    - lloyd-christmas 8y ago
      Congrats, that's 3 years in jail†. Enjoy your time! †I am not a lawyer. This is not legal advice.
      - stale2002 8y ago
        How much money do you want to bet against me, that he will not actually end up in jail for 3 years because of this off the cuff statement? I'll give you 10 to 1 odds, up to 10K.
        rootusrootus 8y ago
        Hahahaha, this is comedy gold. I have no idea how important the disclaimers really are, but they are definitely popular. Maybe just paranoia. Edit: it was funnier before you edited it and made it more serious...
        stale2002 8y ago
        Ugg, I know. Sometimes I get too involved in explaining a concept, and that ruins the joke. Ive Editted it back.
- ubernostrum 8y ago
  Because relationships between investors and their financial advisors are regulated, and you don't want to create even the appearance of such a relationship when you write a column for mass consumption. It's the same CYA reason that people will respond to a question about law with "Here's what the law says, but I am not your lawyer and this is not legal advice".
- NegativeK 8y ago
  Taken charitably, it's shorthand for "talk to your actual investment adviser before doing this, please."
- hyperpape 8y ago
  To add to the other two responses: I can't find it, but there was a great post on HN about how if you are a lawyer, it is important that you never create as much as an impression that you are giving someone legal advice in your capacity as a lawyer, because it can create liabilities. No exchange of money, no contract required. I don't know if investing is the same, but that's the answer for lawyers.
  - wgerard 8y ago
    Worth noting: Matt Levine used to be a practicing attorney. The CYA stuff makes a lot more sense in light of that.
    - gimmeThaBeet 8y ago
      Yeah, simple as that, Levine is a trained lawyer. Whenever he talks about his rules of insider trading, it's peppered with "now this is definitely not legal advice, but..."
- icedchai 8y ago
  It's more like common sense.
wgerard 8y ago
Matt Levine has another article that does a great job of summing up short sellers [1] (see "Short selling, etc."). I used to work on a product that tracked short sellers, so I had to read a lot of press releases and interviews and etc. from short sellers. I definitely agree with Matt Levine's summary here: > "One thing I will say for short sellers is that many of them really do believe their (standard, correct) claims about their role in financial markets: that they make markets more efficient, deflate bubbles, root out fraud and delusion, and generally make the world better with their unpopular and negative activity. They see it as a noble but misunderstood calling." And in quite a few cases, they're not wrong - I mean, Jim Chanos is probably most well-known for his short position in Enron. Say what you want about Bill Ackman, but Herbalife does kinda seem like a pyramid scheme. It's really interesting, and while the financial benefits are obviously there it does seem like quite a few of them really just enjoy calling bullshit and exposing people/corporations for it. I don't doubt they would probably also do really well as investigative journalists. 1: https://www.bloomberg.com/view/articles/2018-09-12/banks-do-the-trades-they-want-to-do https://www.bloomberg.com/view/articles/2018-09-12/banks-do-...
- soneca 8y ago
  The episode "Drug Short" [0] of Netflix's show "Dirty Money" paints a very heroic and society-benefiting (is that a word?) picture of short-sellers, in particular Fahmi Quadir. Well, I bought it! :) I was rooting for her during the episode. [0] https://www.imdb.com/title/tt7909184/?ref_=ttep_ep3 https://www.imdb.com/title/tt7909184/?ref_=ttep_ep3 [1] https://www.forbes.com/profile/fahmi-quadir/ https://www.forbes.com/profile/fahmi-quadir/
- AnthonyMouse 8y ago
  > they make markets more efficient, deflate bubbles, root out fraud and delusion, and generally make the world better with their unpopular and negative activity. This is true when they're shorting Enron or some other fraudulent entity. The issue is that you can short any high risk high reward play and make money if they fail. But then enough shorting can cause them to fail, because it makes it more difficult to raise money by selling new shares or using shares as collateral. And causing a large undertaking to fail when it otherwise wouldn't have is obviously not efficient. It also increases volatility because on one side the existence of the shorts makes the company more likely to fail, but if the company succeeds anyway or even just stays the course then there could be a "short squeeze" as the shorts have to buy back the shares they owe when no one is really interested in selling, so the share price skyrockets. It's not exactly a moderating influence.
kapurs151 8y ago
The full profile of Jim Chanos (that the article is quoting) is available here: https://www.institutionalinvestor.com/article/b1b00ynrgtn05r/How-Jim-Chanos-Uses-Cynicism-Chutzpah-and-a-Secret-Twitter-Account-to-Take-on-Markets-and-Elon-Musk https://www.institutionalinvestor.com/article/b1b00ynrgtn05r... The part that I thought was most interesting was that he structures his fund as 190% passive long and 90% active short. This way, his short fund (which has average annualized returns of -0.7%) can still allow him to make a lot of money. I like the idea that a short fund can make money if they can beat the negative of the passive index - so if the S&P returns 10%, and I can have a short fund that returns -5%, I can use his strategy to outperform the S&P.
- IBM 8y ago
  You can only use his strategy if you do the work on the short side and come up with good ideas. That's what his actual edge is. He doesn't have to disclose short positions like he does long positions in 13-F filings, so you only know what he's short if he's willing to talk about it publicly. Being a short seller is like playing a game on hard mode. The bias of most market participants, sell-side analysts, self-promoting CEOs, and frauds are to the long side. Being net long is the only way to stay in the game over decades like Chanos has. Chanos has been short TSLA for 4 years, and that's only been possible because the fund is net long [1]. The only reason he probably hasn't shut the short-only fund is because clients who allocate to it are probably hedging other long exposure they have allocated to other managers. [1] https://www.youtube.com/watch?v=Zv3YhMzS0z4 https://www.youtube.com/watch?v=Zv3YhMzS0z4
- bedhead 8y ago
  I have Chanos' returns since inception in the 1980's. I have talked to Chanos a bunch. The guy is the biggest enduring fraud, figuratively speaking, in the investing world. His returns are dreadful. There is no money manager in the history of the world in which his own personal enrichment has diverged so much from his clients'. The worshipping of him is nothing short of shameful. I thought we despise the notion of getting rich at other peoples' expense? Btw, losing less than the S&P is not a strategy but if you think it adds alpha I won't bother debating. Have fun spending alpha.
deleted 8y ago
[deleted]
nodesocket 8y ago
For me the upside of short selling is not worth the risks[1]. Long term the market appreciates, so if you are young, wait it out and rake in the annual average 6% S&P market gain. [1] RISKS - Upside is capped to 100%, the most you'll ever make is 100% shorting. - Downside is uncapped, unlimited losses. - Have to pay interest while you hold the short position. If you really believe in a short position, the only strategy I'd personally recommend is put options. Limits your loss to the total cost of the options, and upside is more than 100% potentially.
- bluquark 8y ago
  Put options have their own enormous downsides. You pay a large premium up front, and you lose everything if the stock either A) doesn't change value at all or B) collapses later than you predict. Both methods are a rotten deal. That's quite unfortunate for society as a whole, since it means there are very few people with the incentive to deflate bubbles and frauds.
  - toast0 8y ago
    Put options cap your downside, and cap your time horizon. You can pay the premium for a very long horizon if you want -- if you think the company is going to fail all the way to zero, the prices pretty far out of the money are often pretty low even at 2 years out. It would be pretty disappointing if the stock kept climbing and then crashed 2 days after the options expired; but at that point you might have given up on your traditional shorts as well.
    - bluquark 8y ago
      It would be even more disappointing if the stock barely moved, and then crashed 2 days after the option expired. In that event, the put goes to zero and the traditional short wins the jackpot. A more abstract way to make the same point is that a put or call is making a bet about volatility, whereas traditional long or shorting is a pure directional bet.
      - 8y ago

84 points by hyperpape 8y ago

"The obvious lesson is: Don’t put all your money in a short-selling fund. (Not investing advice.)" Why do people always say "You should/shouldn't do X, Y, and Z. But this isn't investing advice"? It's obviously written as investing advice. What else is it? Life advice? Casual advice? If it's not investing advice, don't make such an authoritative claim.

deleted 8y ago
[deleted]
rootusrootus 8y ago
Because if you are in a position where you might plausibly give investment advice, and you make a statement that could conceivably be construed as investment advice by the authorities, you may find yourself running afoul of the law. So just like a lawyer making comments about legal choices, you make it explicit that you're not acting as a professional advisor.
- mehrdadn 8y ago
  Is there any precedent for this kind of short disclaimer saving someone's legal rear as a defense?
  - mikestew 8y ago
    In order for there to be a history, there would first be a few obstacles to get over: "What are you, stupid? I said it wasn't investment advice. Sue if you want, good luck finding a lawyer to take the case." Okay, potential plaintiff found a lawyer who will take the case. It would still need to go before a judge who didn't immediately laugh it out of the court room. After all that, then you might find a court case recorded somewhere. Let us know what you find.
  - noonespecial 8y ago
    It might work more like a fence. It's hard for me to get a count of how many not-dogs are in my yard right now that my fence successfully kept out.
  - lloyd-christmas 8y ago
    I'm not sure of any precedent, but the disclaimer isn't just a "don't hold me to it" liability insurance. There are certain certifications required related to various types of products and recommendations (primarily Series 6, 7, 65, and 66). If they don't have that certification and act in that role, it's not just oops-you-can-sue-me liability, it's an actual possibility of jail time.
- Y_Y 8y ago
  I am your lawyer and investment advisor, and this is legal and investment and skincare advice. Short APPL, pay your taxes, wear sunscreen.
  - lloyd-christmas 8y ago
    Congrats, that's 3 years in jail†. Enjoy your time! †I am not a lawyer. This is not legal advice.
    - stale2002 8y ago
      How much money do you want to bet against me, that he will not actually end up in jail for 3 years because of this off the cuff statement? I'll give you 10 to 1 odds, up to 10K.
      - rootusrootus 8y ago
        Hahahaha, this is comedy gold. I have no idea how important the disclaimers really are, but they are definitely popular. Maybe just paranoia. Edit: it was funnier before you edited it and made it more serious...
        stale2002 8y ago
        Ugg, I know. Sometimes I get too involved in explaining a concept, and that ruins the joke. Ive Editted it back.
ubernostrum 8y ago
Because relationships between investors and their financial advisors are regulated, and you don't want to create even the appearance of such a relationship when you write a column for mass consumption. It's the same CYA reason that people will respond to a question about law with "Here's what the law says, but I am not your lawyer and this is not legal advice".
NegativeK 8y ago
Taken charitably, it's shorthand for "talk to your actual investment adviser before doing this, please."
hyperpape 8y ago
To add to the other two responses: I can't find it, but there was a great post on HN about how if you are a lawyer, it is important that you never create as much as an impression that you are giving someone legal advice in your capacity as a lawyer, because it can create liabilities. No exchange of money, no contract required. I don't know if investing is the same, but that's the answer for lawyers.
- wgerard 8y ago
  Worth noting: Matt Levine used to be a practicing attorney. The CYA stuff makes a lot more sense in light of that.
  - gimmeThaBeet 8y ago
    Yeah, simple as that, Levine is a trained lawyer. Whenever he talks about his rules of insider trading, it's peppered with "now this is definitely not legal advice, but..."
icedchai 8y ago
It's more like common sense.

wgerard 8y ago

Matt Levine has another article that does a great job of summing up short sellers [1] (see "Short selling, etc."). I used to work on a product that tracked short sellers, so I had to read a lot of press releases and interviews and etc. from short sellers. I definitely agree with Matt Levine's summary here: > "One thing I will say for short sellers is that many of them really do believe their (standard, correct) claims about their role in financial markets: that they make markets more efficient, deflate bubbles, root out fraud and delusion, and generally make the world better with their unpopular and negative activity. They see it as a noble but misunderstood calling." And in quite a few cases, they're not wrong - I mean, Jim Chanos is probably most well-known for his short position in Enron. Say what you want about Bill Ackman, but Herbalife does kinda seem like a pyramid scheme. It's really interesting, and while the financial benefits are obviously there it does seem like quite a few of them really just enjoy calling bullshit and exposing people/corporations for it. I don't doubt they would probably also do really well as investigative journalists. 1: https://www.bloomberg.com/view/articles/2018-09-12/banks-do-the-trades-they-want-to-do https://www.bloomberg.com/view/articles/2018-09-12/banks-do-...

soneca 8y ago
The episode "Drug Short" [0] of Netflix's show "Dirty Money" paints a very heroic and society-benefiting (is that a word?) picture of short-sellers, in particular Fahmi Quadir. Well, I bought it! :) I was rooting for her during the episode. [0] https://www.imdb.com/title/tt7909184/?ref_=ttep_ep3 https://www.imdb.com/title/tt7909184/?ref_=ttep_ep3 [1] https://www.forbes.com/profile/fahmi-quadir/ https://www.forbes.com/profile/fahmi-quadir/
AnthonyMouse 8y ago
> they make markets more efficient, deflate bubbles, root out fraud and delusion, and generally make the world better with their unpopular and negative activity. This is true when they're shorting Enron or some other fraudulent entity. The issue is that you can short any high risk high reward play and make money if they fail. But then enough shorting can cause them to fail, because it makes it more difficult to raise money by selling new shares or using shares as collateral. And causing a large undertaking to fail when it otherwise wouldn't have is obviously not efficient. It also increases volatility because on one side the existence of the shorts makes the company more likely to fail, but if the company succeeds anyway or even just stays the course then there could be a "short squeeze" as the shorts have to buy back the shares they owe when no one is really interested in selling, so the share price skyrockets. It's not exactly a moderating influence.

kapurs151 8y ago

The full profile of Jim Chanos (that the article is quoting) is available here: https://www.institutionalinvestor.com/article/b1b00ynrgtn05r/How-Jim-Chanos-Uses-Cynicism-Chutzpah-and-a-Secret-Twitter-Account-to-Take-on-Markets-and-Elon-Musk https://www.institutionalinvestor.com/article/b1b00ynrgtn05r... The part that I thought was most interesting was that he structures his fund as 190% passive long and 90% active short. This way, his short fund (which has average annualized returns of -0.7%) can still allow him to make a lot of money. I like the idea that a short fund can make money if they can beat the negative of the passive index - so if the S&P returns 10%, and I can have a short fund that returns -5%, I can use his strategy to outperform the S&P.

IBM 8y ago
You can only use his strategy if you do the work on the short side and come up with good ideas. That's what his actual edge is. He doesn't have to disclose short positions like he does long positions in 13-F filings, so you only know what he's short if he's willing to talk about it publicly. Being a short seller is like playing a game on hard mode. The bias of most market participants, sell-side analysts, self-promoting CEOs, and frauds are to the long side. Being net long is the only way to stay in the game over decades like Chanos has. Chanos has been short TSLA for 4 years, and that's only been possible because the fund is net long [1]. The only reason he probably hasn't shut the short-only fund is because clients who allocate to it are probably hedging other long exposure they have allocated to other managers. [1] https://www.youtube.com/watch?v=Zv3YhMzS0z4 https://www.youtube.com/watch?v=Zv3YhMzS0z4
bedhead 8y ago
I have Chanos' returns since inception in the 1980's. I have talked to Chanos a bunch. The guy is the biggest enduring fraud, figuratively speaking, in the investing world. His returns are dreadful. There is no money manager in the history of the world in which his own personal enrichment has diverged so much from his clients'. The worshipping of him is nothing short of shameful. I thought we despise the notion of getting rich at other peoples' expense? Btw, losing less than the S&P is not a strategy but if you think it adds alpha I won't bother debating. Have fun spending alpha.

deleted 8y ago

[deleted]

nodesocket 8y ago

For me the upside of short selling is not worth the risks[1]. Long term the market appreciates, so if you are young, wait it out and rake in the annual average 6% S&P market gain. [1] RISKS - Upside is capped to 100%, the most you'll ever make is 100% shorting. - Downside is uncapped, unlimited losses. - Have to pay interest while you hold the short position. If you really believe in a short position, the only strategy I'd personally recommend is put options. Limits your loss to the total cost of the options, and upside is more than 100% potentially.

bluquark 8y ago
Put options have their own enormous downsides. You pay a large premium up front, and you lose everything if the stock either A) doesn't change value at all or B) collapses later than you predict. Both methods are a rotten deal. That's quite unfortunate for society as a whole, since it means there are very few people with the incentive to deflate bubbles and frauds.
- toast0 8y ago
  Put options cap your downside, and cap your time horizon. You can pay the premium for a very long horizon if you want -- if you think the company is going to fail all the way to zero, the prices pretty far out of the money are often pretty low even at 2 years out. It would be pretty disappointing if the stock kept climbing and then crashed 2 days after the options expired; but at that point you might have given up on your traditional shorts as well.
  - bluquark 8y ago
    It would be even more disappointing if the stock barely moved, and then crashed 2 days after the option expired. In that event, the put goes to zero and the traditional short wins the jackpot. A more abstract way to make the same point is that a put or call is making a bet about volatility, whereas traditional long or shorting is a pure directional bet.
    - 8y ago