The Concentration Manifesto For Shorts
In this article, Cameron Hight summarizes the data from a paper by Della Corte, Kosowski, Rapanos that shows there is demonstrable skill in short selection for the largest position sizes and provides further support for the Concentration Manifesto.
We were reading the great research that comes from our friends at Novus recently and saw a reference to a paper written by Della Corte, Kosowski, Rapanos (2019). This paper analyzes 1.7 million short positions from 585 managers that contributed to the European Union Short Disclosure Information dataset from 2012-2018. They found that highest quintile conviction shorts (P5 - as measured by position size) outperformed lowest quintile conviction shorts (P1). In fact, the highest conviction shorts were the only cohort that had a mean return that was negative on an absolute basis (positive contribution for shorts).
After applying a six-factor model, the alpha of a strategy going long the low conviction and short the high conviction had an alpha of 11%. Ideally, the results would show a gradual declination between P1 and P5, but P4 does not follow that trend. Nevertheless, there is a demonstrable skill in short selection for the largest position sizes and provides further support for the Concentration Manifesto.