Short-Selling Momentum

Pessimism was on the march in February, creating short-selling momentum, as many long-short equity funds increased their net short positions amid the escalating negative market sentiment. Dedicated short-sellers faced a tougher task, as many long-short managers, most of them net long, piled into many of their trades.

But who can blame them? The fund-weighted composite index compiled by Hedge Fund Research in Chicago was down 1.18 percent for the month and off 19.04 for the 12 months ended February 28, while short-bias funds were up 4.14 percent in February and 27.96 percent over 12 months, the best performance of any strategy for both the month and the trailing year, according to HFR.

“Our job is harder when everyone shorts,” concedes Nick Phillips, research director at Holden Asset Management, a short-bias manager in Greenwich, Connecticut. “Everyone is rushing for the exits, which skews our process.” Nonetheless, Holden’s Short-Biased Offshore Fund, which has about $100 million in assets, was up close to 6 percent in February and 39.25 percent over 12 months, handily beating the HFR short-bias benchmark. “A lot worked because the markets were so weak,” explains Phillips, whose fund bet in particular against automotive-related stocks in February.

Newport Beach, California–based Oak Hill REIT Management did well specializing in the pairing of weak real estate investment trusts against stronger ones. In February its $100.7 million Oak Hill REIT Plus Fund bought the REITs of Taubman Centers and Simon Property Group while shorting those of Pennsylvania Real Estate Investment Trust and CBL & Associates Properties. Although the first two were both down 22 percent on the month, the second pair were off 27 percent and 30 percent, respectively. The trade helped give the fund a 3 percent return. “Relative valuations drive returns for us,” explains Jon Fosheim, CEO of Oak Hill, which was up 18.95 percent for the 12 months ended this February.