EXTENDED Equity Strategies

Posted on January 13, 2025 by Dr. David Edward Marcinko MBA MEd CMP™

By Staff Reporters

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Extended equity strategies attempt to provide better returns than possible with long-only investments.

An example of an extended equity strategy is a 130/30 portfolio, which gets its designation from taking a 130% long position and a 30% short position. In practice, this would mean $100mm invested in stocks that are viewed as attractive. Next, the manager would borrow and sell short $30mm of unattractive stocks. Then the manager uses the proceeds from the short sale to buy an additional $30mm of attractive stocks. This results in a portfolio that has 130% long and 30% short exposure to stocks, or “extended” exposure to equities relative to a long-only, 100% stock portfolio.

Nevertheless, it’s important to point out that here is the risk of theoretical unlimited amount of loss with short selling, (i.e. the price of the short-sold stocks increases; the long position can only go down to $0).

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SHORT: Tesla Stock?

Posted on January 4, 2023 by Dr. David Edward Marcinko MBA MEd CMP™

SHORT SALE

By Staff Reporters

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DEFINITION: Short selling involves borrowing a security whose price you think is going to fall from your brokerage and selling it on the open market. Your plan is to then buy the same stock back later, hopefully for a lower price than you initially sold it for, and pocket the difference after repaying the initial loan.

CITE: https://www.r2library.com/Resource/Title/082610254

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Good news for anyone who was busy shorting Tesla

Tesla’s stock plummeted more than 12% yesterday for its worst trading session in more than two years. The proximate cause: Though the EV manufacturer sent out a record 405,278 vehicles in the last quarter of 2022, it missed analyst expectations and its own growth goal for the year.

Tesla’s brutal selloff was the continuation of a dramatic downward trend: The most valuable automaker in the world lost 65% of its value in 2022.

And while it may be easy to pin the blame on CEO Elon Musk’s fascination with his shiny new toy, Twitter, the problems go beyond a distracted boss:

  • Production has slowed down due to Covid shutdowns in China.
  • Demand has cooled for its vehicles due to lower gas prices, interest rate hikes, and increased competition.
  • It has suffered from logistical issues that were at least partially to blame for its inability to deliver all of the vehicles that it produced.

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Identifying Suspicious Short Selling

Posted on July 11, 2010 by Dr. David Edward Marcinko MBA MEd CMP™

But Not Who’s Behind the Trades

By Karen Weise
ProPublica, July 8, 2010

Last weekend, The Wall Street Journal highlighted new academic research [1] showing that investors may be trading on insider information after companies approach hedge funds for loans.

Researchers found that on average, in the five days before companies announce a loan from a hedge fund, the volume of short sales increases by 75 percent as compared with the 60 days before a deal is announced. There was no comparable uptick in betting against companies that borrowed money from commercial banks instead.

Short Selling

With short selling, hedge funds and other investors make money by wagering that a stock’s price will fall. Borrowing from hedge funds rather than commercial banks can be seen as a sign of distress, as hedge funds tend to charge higher interest rates.

One of the researchers, Debarshi Nandy of the Schulich School of Business at York University in Toronto, told ProPublica that the findings pose an important question of whether hedge funds are using insider information inappropriately.

Working Draft

Here’s a PDF of a working draft of the paper [2]; the final version is not yet published. When companies ask hedge funds to consider giving them a loan, they typically require that the funds sign nondisclosure agreements. That’s because the borrowers divulge confidential financial information in the process of trying to get a loan — information that can provide insight into a company’s future performance. That, in turn, can be valuable to investors.

Examining Changes

In looking at instances when companies made changes to existing loans, researchers found that the short sales on companies amending loans from hedge funds were profitable, whereas similar short sales on companies amending loans from banks resulted in losses. But, the researchers stop short of saying that hedge funds definitely make insider trades. It’s all a little bit hazy because there is little disclosure required for hedge funds and short selling. While the paper identifies “abnormal” shorting activity, the identity of the investors making the trades is a mystery. “If it is truly insider trading by the fund or a ‘tip-ee’ of the fund, it would really be good to get some further data on who is actually doing the trading,” said Anita Krug, an expert in the laws governing hedge funds.

Assessment

Investors are required to notify the  Securities and Exchange Commission when taking large long positions, but there is no equivalent requirement for short bets. During the week that Lehman Brothers collapsed in the fall of 2008, the SEC issued a temporary order [3] requiring investors to report large short positions, but it did not renew that requirement last summer when the order lapsed [4]. The pending financial reform bill also would not require disclosure.

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Conclusion

Short sellers say more regulations would discourage their trading, which they argue helps moderate market bubbles and contributes to market efficiency, says Mark Perlow, an attorney at K&L Gates who represents hedge funds.

Link: http://www.propublica.org/article/identifying-suspicious-short-selling-but-not-whos-behind-the-trades

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