Regal Funds Management has upended its short selling approach to combat the pressures of a rising bull market, focusing instead on share price blips that have included so-called meme stock GameStop, according to chief investment officer Phil King.
The $3 billion fund manager’s shift to quick, tactical trades to drive its short book follows the dramatic rally in global equities through the pandemic, helped along by record levels of fiscal and monetary stimulus and near-zero interest rates that have bolstered valuations.
“We’ve had to adapt in the way we short,” Mr King said in an interview with The Australian Financial Review. Shorting has been very, very difficult, he added, given the boom in share prices around the world.
“Low interest rates mean many stocks trade like bitcoin - there is no fundamental valuation and they get pushed around by news flow and sentiment.”
The fund manager has tweaked its approach by focusing less on companies with declining prospects that will depress their shares over time to instead hunt out short-term dislocations that temporarily inflate stock prices.
“The traditional red flags don’t work so well. Expensive stocks can get more expensive and balance sheets don’t matter when cash is free,” Mr King said.
“We’re more trading-oriented on the short side than we traditionally have been.”
A small short position earlier this year in GameStop, a company that became the centre of a fight between retail traders and a hedge fund betting on the company’s demise, typifies the refined approach.
‘Short squeeze’
Shares in the US computer game retailer soared 1700 per cent in the first few weeks of January as retail investors rushed into the stock, but have since flickered 44 per cent lower.
The initial jump spurred short-sellers to exit, sending shares even higher, while brokers serving short-sellers that remained were also compelled to buy the stock to cover short positions for fund manager clients.
This so-called “short squeeze” dynamic pushed the shares skyward, offering a chance for other short-sellers to load up on bets that price would eventually fall.
“We see things like GameStop where there is a huge short squeeze as an opportunity to short some shares,” Mr King said.
The sharp increase in global share prices combined with a rush to the markets from retail investors has created a tough environment for short sellers, akin to the giddy days of the dot com boom, he said.
“A lot of people got hurt in the tech bubble in 2000 shorting shares, but the aftermath of the bubble was probably the best time for me on the short side.
“When the bull market finally ends there will be some great opportunities but for the moment it’s good to be cautious.”
Mr King is one of Australia’s best known investors and was inducted into the Australian funds management hall of fame two years ago. He will appear at the Sohn Hearts & Minds conference on Friday to present one of the only short stock picks at the event.
The conference raises money for charity and has attracted big names across the global investment management industry, including Charlie Munger, right-hand man to Warren Buffett, who will headline the day.
As short selling has become more difficult, Regal has turned one of its successful short positions over the past few years into a long holding.
Regal held a short position in AMP through the wealth manager’s woes that have included revelations the company charged deceased former customers for financial advice they did not receive.
AMP shares have lost three-quarters of their value in the past five years and slipped below $1 for the first time this year, touching a closing low of 92¢ in September.
Regal purchased shares in the “mid-90¢,” according to King, in a bet that new chief executive Alexis George can turn the company’s fortunes. AMP shares have climbed 6.5 per cent from the lows.
“We were short for many, many years, and we think the new CEO is doing all the right things, and it’s the start of a turnaround story,” he said.
“People think the situation is worse than it really is and we think they can retain a lot of their current investors, and there’s a very, very solid brand and business.”
Short selling has become a harder practice through the rally in part because of greater retail investor participation and also due to the rise in passive investing, in which investors buy into funds that blindly track popular indices like the S&P 500 or S&P/ASX 200.
“The impact of both passive investors and retail investors in the market has made shorting difficult,” he said.
“Passive investing often means the stocks that go up, keep going up, and then retail investors are often attracted to speculative stocks.”
This has added pressure on the firm to find attractive short bets given the fund manager is broadly positive on the sharemarket rally with the current forecasts for economic growth.
“We are constructive on the markets, so we are having to run a long bias in the funds that do run a long bias and in our market-neutral funds we always have to find short ideas,” he said.
This article was originally posted by The AFR here.
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