HFs shorting UK LO AM
https://www.ft.com/content/cbdfcb42-6c70-499c-999d-7e1cda0e4bd4
Top HF, Citadel & Point 72 among them, are shorting UK LO AM e.g., Abrdn, Hargreaves Lansdown etc. Does this present a case for L/S? Is L/S a more comprehensive strategy? What does the research look like for cumulative returns of LO vs L/S?
Btw Abrdn is doing pretty badly lately, has it always been a shit company?
Not sure if cumulative returns is a useful benchmark in this specific instance. Citadel and Point72 atleast, aim to provide returns independent of market correlation since they run a beta-neutral strategy. I guess you could say they're more comprehensive from an alpha-generation standpoint but they're simultaneously trading off of tighter investment horizons (quarterly) so naturally, they offer less from a long-term investing perspective - this lack of ability/interest in looking at LT company profitability/positioning arguably makes them less comprehensive in that respect.
Ultimately just think different things matter to different pools of capital; not commenting on L/S as a whole but Citadel/P72 running a market/factor neutral book means they shouldn't be affected by the current market (namely generalised bearish equity markets) and changes to fiscal policy whereas LO funds which are more exposed to macro/beta factors will be.) Also worth mentioning that if Citadel/P72 are short on these companies, they will almost certainly be long on certain competitors since they run a tight, idio-pair-focused investment strategy. In that sense, I suppose they're more comprehensive from a short-term company-specific profitability standpoint - even if their longs are doomed to lose money.
TLDR; p72/Citadel strategy means they're supposed to be neutral to market factors but operate on a more short-term basis - lack of exposure to beta means they're less affected by macro head/tail winds compared to LO. This lack of exposure can also mean they're less comprehensive from a LT/growth investing perspective ig.
I don't know what I'm talking about though, admittedly.
‘Idio-pair-focused’, ‘comprehensive from an alpha generating standpoint’. Lmao HF bros are such a joke sometimes. Have you lot tried speaking English?
very good explanation, thanks. Gave me some food for thought. Want to throw out some more discussion points following on your explanation if you don't mind:
1) I guess we say LO is more comprehensive from a LT standpoint cuz the stock market trends upwards over the LT, yes? There's plenty of research, one from Jeremy Siegel I've read, that just a couple of the few worst trading days in the S&P contributed to like 50% (I forget this number) of loss in a portfolio holding the basket of stocks over the entire time frame. So i get why LO is more comprehensive, but then since a few major selloffs can wreck your portfolio that much, could LS stand up to that challenge better than LO?
2)
Good point. But then, is the most widely quoted benchmark for HF the cumulative return? It is certainly for AM, but is it true for HF? I guess it ties back to the fact that HF serves the filthy rich by providing uncorrelated income streams. In that case, would it make more sense to benchmark HF using alpha and beta? If the purpose of HF holds true for the filthy rich (to provide market-neutral returns), then would L/S be more suited to fit that purpose?
3) How about holding a portfolio of LO and L/S funds then? Are there any HF basket funds lol
4) Why can't we think of L/S as basically LO + an extra perk of shorting any bear markets when the situation calls for it? Holding the longs for the long term plus running a beta-neutral strategy
Hi there, want to throw out the disclaimer that I'm a college student so take everything I say with a grain of salt. Someone who knows better than me will likely chime in and correct anything wrong I've said. Also, as I don't think my post was clear enough, my points were specific to Millenium/Point72/Citadel-type funds since they're the only ones I have some XP with.
1) Probably, there are some funds that act in this way but you've also got to consider fundamental differences between HFs and AMs. Namely risk tolerance and active v passive management or w/e; line blurs at some places but I'm not really equipped to talk about it, sorry. I will say that to my understanding, L/S is a comparison game a lot of the time.
in terms of the LT horizon, I was talking about the idea that Point72 and Citadel trade a lot around earnings and play a more quarterly game so don't really hold LT investments in the same way. it's not just running a neutral shop, they also have tighter investment horizons so aren't necessarily looking or thinking about the broader thematics which would have a long-term impact, LO shops will naturally have better insights into that. This is what I meant by different pools of capital caring about different things.
2) Quite a lot to unpack here and I'm not the best to do it. I will say that:
2/4) I don't how you can achieve a market-neutral book through LO. It is my understanding that its achieved through a specific type of L/S; you would utilise some pair trades in your portfolio and be long and short a specific sector. Point72 and Citadel pods will have a book of longs and a book of shorts which should net each other out. In reality, PMs are given some %lee way either side but you'd imagine they aim for the book to be net zero, or very close to it.
Its not the same as just shorting a bear market or longing a bull market for market-neutral funds, they play both sides in the same sector, regardless of the current market direction. So in a given day if an entire sector is up due to noise/beta/whatever but there's no apparent changes to the underlying fundamentals of the business (no discernable alpha causing this), the book of longs will be up but the shorts should net it out to zero since you're going L/S evenly in the same sector. Vice versa if the sector is bearish. You're protected from day-to-day price movements which are beta-caused and not idiosyncratic to the underlying company and its market positioning.
There are probably funds that do what you're suggesting, but by definition, they can't be beta-neutral. Not all L/S funds aim to be.
Good shit here, thanks i appreciate it
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