CASLA: Shorting is more of an art than a science
31 May 2019 Toronto
Image: Shutterstock
Shorting is more of an art than a science, according to one speaker at the Canadian Securities Lending Association (CASLA) conference.
The speaker suggested that shorting is more of a thesis. They said: 鈥淵our initial thesis might be blown, and so re-evaluating your thesis is very important.鈥�
The moderator commented: 鈥淲hen I think about shorting, it is incredibly difficult and there are lots of challenges to it, how do you establish a thesis around it and how do you execute it?鈥�
In response, one speaker explained: 鈥淲e look for red flags鈥攆or example, bank statements鈥攁nd we take these we look deeper into them. A big part of what we look for on the short side is high yields.鈥�
The moderator asked panellists if they had spoken to a management team with the preconceived notion that you want to short them.
One panellist replied: 鈥淚nterviewing the management teams is a key part of our process. Questions, for example, include 鈥榠f you could only sell through one product what would it be?鈥�.鈥�
They explained: 鈥淨uestions like this to help probe thinking better. You don鈥檛 become a CEO unless you鈥檙e an excellent sales person, people will tell you the most optimistic perspective on it. It is about getting them to tell the full story, such as a series of interviews.鈥�
In terms of how they find those red flags, one speaker said: 鈥淭o find those red flags we look at past records, reputation, and it is all rooted in publicly available information. We also talk with people in the industry and network.鈥�
The moderator also asked panellist that when a red flag company is found and you have agreed it鈥檚 a good opportunity, but given history and behaviours, is backing out an option.
One speaker on the panel affirmed: 鈥淭he way that we conduct ourselves is by being convinced we are doing the right thing; we are not in the business with falsifying information so we are usually comfortable that we have the right information.鈥�
The panel also discussed macroeconomics, and one speaker highlighted: 鈥淸The industry] spend a lot of time thinking about the macroeconomic backdrop. If the equity market decides to peel off 20 percent, then fear ripples.鈥�
鈥淚f we look at this year, there are several pillars as to why we have had a good run, and one is that the US Federal Reserve stopped hiking as they made clear that hikes were far too high鈥攕o that is a risk eliminated.鈥�
鈥淚n the latter half of last year, and in the early part of this year we saw signs of stabilisation, so there was a thought that the worst was behind us.鈥�
They continued: 鈥淎 big factor was that China and the US were in trade talks and people thought the deal would be done, with no further tariffs. That fuelled the rally risk asset.鈥�
鈥淚n the last few weeks, we have seen that the negotiations between the US and China are not going well and the markets need to re-adjust.鈥�
Another speaker added: 鈥淲e are in this trade war process and it has been surprisingly calmer than it has been in the past.鈥�
鈥淭he US is attempting to remain the number one superpower in the world. In my mind, I don鈥檛 think a deal will be easily reached and I am incorporating a fairly defensive posture in my business.鈥�
The speaker suggested that shorting is more of a thesis. They said: 鈥淵our initial thesis might be blown, and so re-evaluating your thesis is very important.鈥�
The moderator commented: 鈥淲hen I think about shorting, it is incredibly difficult and there are lots of challenges to it, how do you establish a thesis around it and how do you execute it?鈥�
In response, one speaker explained: 鈥淲e look for red flags鈥攆or example, bank statements鈥攁nd we take these we look deeper into them. A big part of what we look for on the short side is high yields.鈥�
The moderator asked panellists if they had spoken to a management team with the preconceived notion that you want to short them.
One panellist replied: 鈥淚nterviewing the management teams is a key part of our process. Questions, for example, include 鈥榠f you could only sell through one product what would it be?鈥�.鈥�
They explained: 鈥淨uestions like this to help probe thinking better. You don鈥檛 become a CEO unless you鈥檙e an excellent sales person, people will tell you the most optimistic perspective on it. It is about getting them to tell the full story, such as a series of interviews.鈥�
In terms of how they find those red flags, one speaker said: 鈥淭o find those red flags we look at past records, reputation, and it is all rooted in publicly available information. We also talk with people in the industry and network.鈥�
The moderator also asked panellist that when a red flag company is found and you have agreed it鈥檚 a good opportunity, but given history and behaviours, is backing out an option.
One speaker on the panel affirmed: 鈥淭he way that we conduct ourselves is by being convinced we are doing the right thing; we are not in the business with falsifying information so we are usually comfortable that we have the right information.鈥�
The panel also discussed macroeconomics, and one speaker highlighted: 鈥淸The industry] spend a lot of time thinking about the macroeconomic backdrop. If the equity market decides to peel off 20 percent, then fear ripples.鈥�
鈥淚f we look at this year, there are several pillars as to why we have had a good run, and one is that the US Federal Reserve stopped hiking as they made clear that hikes were far too high鈥攕o that is a risk eliminated.鈥�
鈥淚n the latter half of last year, and in the early part of this year we saw signs of stabilisation, so there was a thought that the worst was behind us.鈥�
They continued: 鈥淎 big factor was that China and the US were in trade talks and people thought the deal would be done, with no further tariffs. That fuelled the rally risk asset.鈥�
鈥淚n the last few weeks, we have seen that the negotiations between the US and China are not going well and the markets need to re-adjust.鈥�
Another speaker added: 鈥淲e are in this trade war process and it has been surprisingly calmer than it has been in the past.鈥�
鈥淭he US is attempting to remain the number one superpower in the world. In my mind, I don鈥檛 think a deal will be easily reached and I am incorporating a fairly defensive posture in my business.鈥�
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