Zenith Australian Shares – Long/ Short Sector Review
Is short money the ‘smart money’? Do investors who short sell possess an information advantage or higher skill than traditional, long-only investors? Can short sellers earn superior profits? These questions underpinned an academic study to confirm or disprove this concept within the Australian sharemarket context as part of Zenith’s 2017 review of the Australian Shares – Long/Short sector. Justin Tay, Senior Investment Analyst, explained the rationale for the research: “The recent spate of high profile corporate failures, such as Slater and Gordon and Dick Smith, has highlighted the importance of active management.” “Zenith believes these examples highlight that fund managers who employ short selling can better exploit the inefficiencies in the sharemarket through an explicit short sold position, rather than just maintaining an underweight or zero position.” The study Zenith put short selling under the microscope in its study based on publicly available ASIC records of short selling data on ASX companies, dating back to June 2010. “From the data set, we initially ranked all companies by the level of short interest at the end of each month,” said Tay.
“Next, we conducted a performance simulation which involved constructing an equally weighted portfolio
consisting of the 30 most shorted stocks.”
Although the study showed a strong positive cumulative performance outcome for the Short Portfolio over
the entire period of assessment, Zenith believes it is also important to focus on the risks associated with
these returns.
“The data showed that the Short Portfolio can produce material negative returns over shorter-term
periods, and may also exhibit a longer tail of negative monthly return periods,” said Tay.
Short money is the smart money
Zenith believes the study shows that short sellers, for the most part, are indeed the ‘smart money’.
However, there are significant considerations and limitations that must be considered to generate
profitable outcomes.
“Successful short selling requires a fund manager to have a heightened level of expertise and resourcing,”
said Tay.
“As with most equity related strategies, there may be periods of heightened performance volatility over the
shorter-term; performance should be considered within the context of a longer-term investment horizon to
maximise a strategy’s potential to meet its objectives.”
The Sector Review noted that the 2016 calendar year was particularly difficult for generating absolute
returns from short selling stocks.
“Although it was a tough year for our rated managers, they have consistently added value over the longerterm
from short selling.”
“As such, we maintain our belief that short selling remains an important source of returns for our rated
Australian Shares – Long/Short managers,” Tay concluded.
Summary of the Zenith 2017 Australian Shares – Long/Short Sector Review:
From an initial universe of 30 products:
1 were rated “Highly Recommended”
13 were rated “Recommended”
5 were rated “Approved”
11 were “Not Rated”
SOURCE: Zenith Investment Partners
