Home > Main > Why do People hate Shorts?

Why do People hate Shorts?

January 17, 2011

I ran across this on the Aleph Blog:

Beyond that, I think shorting is a difficult way to make money.  Double alpha sounds wonderful in theory, but is really difficult to do in practice.  Common risk control works for long investments — as investments rise, trimming them locks in gains and lowers risks.  As investments fall, their ability to hurt diminishes.  Downside is limited, and upside is unlimited.

With shorting, upside is limited and downside is unlimited.  I can’t tell you how frustrating it is in working for a hedge fund when a large short moves against you.  You might be right in the long run, but can you survive the short run?  As a short goes wrong its impact gets larger, versus when a short goes right, its impact diminishes.

You can find the same idea, the same sentiment on nearly every equity and bond guy on the street. They hate being short. Hate it not just with their heads, but with their hearts as well. It makes them a bit crazy.

I do not understand this feeling.  I haven’t been short many stocks, and have never traded a CDS, but why is being short such an offensive idea?

I grew up in the futures industry, where being short is as natural as breathing. My first trade ever was a short. But still, even if being short is a bit difficult, I do not understand the risk model that tells you that your exposure gets so much dramatically worse as the price goes up and against you.

I don’t know if people measure risk by notional size or something but this is downright stupid.  Yes, Stupid.  I typically do not measure risks of any sort by their physical size, except after I’ve taken other factors into account. Otherwise I would be afraid of my house, but not of the wicked sharp knives that I use to cut my oranges, simply because my house is larger.

Note the words: “I can’t tell you how frustrating it is in working for a hedge fund when a large short moves against you.”  He probably meant: “I can’t tell you how frustrating it is in working for a hedge fund when a overlarge short moves against you.”  That is a matter of too much risk, and not related having the stock go up in notional value when it gains in price.

So, why do most people on the street hate shorts? Any ideas? I guess Randy Neuman channeled some primal feelings here…

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  1. Peter D
    January 20, 2011 at 10:07 pm

    I guess it is psychological to a large extent. If I am bulling on BoA I can just buy the stock with my disposable income and wait for it to appreciate for as long as I want, the cost of forgone opportunities be damned, and more or less forget about it. If, on the other hand, I believe that sooner or later BoA is gonna end up in receivership (reading enough Bill Black, Naked Capitalism and The Traders Crucible can do this to you), I need to jump thru hoops to approximate/maintain a short and roll it. I guess it is much easier for a trading desk or when you do trading full time.

    P.S. Hope your parents are OK.

  2. Peter D
    January 20, 2011 at 10:08 pm

    What’s the matter with my typing.
    bulling=bullish above

    • TC
      January 21, 2011 at 10:36 am

      lol no worries!

      I agree on the difficulty of maintaining shorts being part of the mental problem. The procedures for maintaining shorts make you concentrate on it more.

      The strange thing to me is that most people seem to take it personally and it bothers them on a level that is not related to the money involved.

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