The men who short-sold the world | FT Alphaville

The men who short-sold the world

Well, not quite. But shorting specialists Data Explorers did come up trumps on Monday with a report which took a global perspective on the last twelve months’ short and long positions.

According to Data Explorers, the charts were compiled from a new portfolio analytics tool, which tracks:

. . . the inventories of 150 custodian banks, asset managers, pension funds, sovereign wealth funds and insurance companies controlling £11 trillion of assets.

Which is an ample enough data set. So, how was the year in short-selling?

As this first chart shows, all those institutions became about 38 per cent less short in equities between 27 March 2009 to 12 March 2010:

Count that as another data point in post-recession equities’ slow grind higher, perhaps — although that’s an interesting Q1 2010 wobble.

However, this second chart of long-short positions is rather less optimistic, implying as it does a 39 per cent increase in shorting:

Again, note the Q1 breakaway.

What’s going on?

FT Alphaville can think of at least two investment trends possibly at play here. First — corporate contagion from 2010’s iffy sovereign debt issuance; and second — the rise, and fall, of all that bond junk. We can’t be sure, however.

For comparison’s sake, this chart shows the long and short of it in government bonds (click to enlarge):

Hello, Greece. In short.

All in all, each of these graphs provides some mood music for the debate on regulating short-selling — and credit default swaps in particular — later in 2010. For one thing, FT Alphaville would love to know whether anyone has been closing their shorts lately because of that anticipated regulatory risk.

Finally — and in connection to the barbs of ‘purely speculative‘ often laid at the feet of short-sellers — it’s also worth pondering how much of all this shorting was in fact based on information in the public domain.

That, after all, was the focus of How are Shorts Informed? Short Sellers, News, and Information Processing, an academic paper recently picked up by the NYT and Barry Ritholtz. As the paper argues:

The financial crisis has also been linked to the timing of short sellers’ trades, with the Securities and Exchange Commission suggesting that short sellers spread “false rumors” in an effort to manipulate firms “uniquely vulnerable to panic.”

To examine whether short sellers’ informational advantage is due to timing, we begin by looking for evidence of abnormal short selling ahead of news events in the U.S. over the 2005 to 2007 period, a pattern that would be consistent with anticipation. We find no such pattern . . . a short seller’s most informative trades appear to be those in response to newly released public news, which is consistent with short sellers being good processors of information.

And the most profitable short sales are made by clients, not market-makers, too.

Worth a read, regulators.

Related links:
Short-selling disclosure: the devil’s in the details – FT Alphaville
The not entirely unexpected Germano-Greek inquisition – FT Alphaville
The scale of sovereign short-selling – FT Alphaville