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The Hard-Knock Life of Short Sellers

Low-quality stocks can outperform markets

Nicolas Rabener
10 min read
20 Feb 2023

SUMMARY

  • Short-biased hedge funds provided negative S&P 500 beta until 2011
  • Thereafter returns became less negatively correlated, but worsened
  • The strategy has generated limited diversification benefits for investors

INTRODUCTION

Running a hedge fund is tough, but some types are tougher to manage than others. For example, an equity long-short fund benefits from a structurally rising stock market, which requires less skill than an equity market neutral fund where the market provides no help at all (read Market Neutral Funds: Powered by Beta?). Trying to provide pure alpha is like squeezing water from a stone.

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