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Northern Exposure: Short-Sighted

Not long ago, fatigued investors were feeling the cumulative weight of two severe financial crises, periods of heightened stock market volatility, and an endless supply of bad economic news. Investors who extrapolated recent market experience were losing faith in equities and looking for alternatives.

Equity strategies that can short became more popular for investors who embraced the idea that making money in a “sideways market” required stock picking unconstrained by a long-only approach. As usual, the investment industry was quick to capitalize on and foster this popular theme by rolling out new products to meet the demand of retail clients looking for market-neutral investments.

Traditional equity managers also started moving in this direction. One prominent Canadian mutual fund company allowed most of its managers to short sell in their portfolios following an industry-wide amendment that permitted mutual funds to short up to 20% of a fund’s net asset value. The company noted: “Our portfolio managers are constantly researching securities of all types. Often, they find overvalued securities that they believe are set to decline in value, but previously there wasn’t a direct way for our investors to benefit from this research.”

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