Monday, September 22, 2008

Cliff Asness is mad as hell 

Cliff Asness runs AQR, a large quant hedge fund. Cliff is a brilliant, thoughtful, and incredibly amusing fellow, and he's mad as hell about the short selling restrictions being imposed by the SEC.

At the risk of restating the obvious, short-sellers play a vital role in any free market. In a world where everyone can only hold long positions, managers have less incentive to work hard, improve stale business models or keep their companies competitive and efficient (sound anything like government bureaucracy?). Short-sellers keep companies, managers and markets honest, and without them the disciplining mechanism is much weaker.

Frankly, I expect some confused socialism from the Brits, but not from our “small government” Republicans (for the record, on matters of economics, I consider myself from the small-government libertarian wing of the Republicans). I now feel quite party-less as I’m reasonably sure Obama would’ve nationalized all industries in similar circumstances, while “hoping” this “change” would work.

Now, after executing the short-sellers in a show trial, the S.E.C. chairman, Christopher Cox, and Treasury Secretary Henry Paulson are probably going to review a parade of soldiers and tanks with 10 old men in coats and big hats, and then perhaps go rest at their dachas in the Crimea. Then again, my socialism analogy, however accurate, may not be the best one possible. After all, I believe the last country to outlaw shorting was Pakistan.
Read the whole thing.

(My own view of short selling has been greatly influenced by David Rocker, who used to run a large short fund and is now retired. He has a million stories about ill treatment because of his preferred strategy. In one tale a CEO refused to take his questions during an investor meeting because he had a short position in the company. He waited around to confront the CEO one on one and the CEO angrily asked him "Why the hell should I talk to you?" Rocker replied, "I'm the only one in this meeting that you know will be buying your stock. You should be trying to convince me to buy it now rather than at the lower price I think I'll be able to get it for later." I thought that was a brilliant reply.)

Cliff, by the way, would point you towards his disclosure statement that accompanies anything he writes for the public. An excerpt:

AQR's legal department would like me to add that I am criminally insane and barred by an order of rhetoric protection from speaking on AQR's behalf. Anyone trading on my advice, or a client, consultant, employee or Iraqi insurgent thinking he has been wronged by my attitudes or opinions can have a $250 out-of-court settlement right now if they'll sign a waiver, otherwise we'll break you. Oh, and we lied about the $250, but seriously, we will break you. Please note, nobody can predict where markets will go in the short-run and sometimes even the long-run. When I point out individual things in the marketplace that I think are strange, or wrong, it doesn't mean I have the perfect answer or can easily make money from it for my clients, for myself, or certainly for you reading this blog! Furthermore, if you read one guy's opinion on a blog and do anything based solely on that, you are an idiot.


By Blogger TigerHawk, at Mon Sep 22, 06:35:00 PM:

I always chat amiably with shorts on precisely the rationale that Rocker articulates. Eventually they are going to buy your stock. That said, this idea that shorts are always benign discoverers of price is a bit hard to swallow. Shorts spread all sorts of rumors that they know or must suspect are false in an effort to talk the price of a stock down. You know this, because if your company is under attack from the shorts you suddenly get hammered with phone calls from panicked longs all asking the same stupid question. The point of these attacks, it is widely understood, is to distract management from actually running the company. While ineffective against big companies, these tactics are very disruptive for companies where the CEO is also chief cook and bottle washer. Now, shorts will say that bulls spread rumors too, only they are favorable. Well, while that may be sensible symmetry from the perspective of the markets, it is an entirely different dynamic from the perspective of the management. So while there are I am sure perfectly honorable shorts who simply take their position and see if it pans out, their reputation suffers by unavoidable association with the people who are actually trying to bring down the company.  

By Anonymous Anonymous, at Tue Sep 23, 09:40:00 AM:

The shorts aren't trying to bring down the company, they're trying to bring down the share price. If rumors and innuendo bring down your company it was seriously troubled long before the shorts showed up.  

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