Short Selling: An evidence-based introduction

By James Clunie

What is short-selling? And is it as profitable - or as dangerous - as it can seem?
In this highly focused eBook, financial expert and author James Clunie reveals everything you need to know about the art of short-selling without wasting your time.
Cutting to the quick, it lays bare:
- all major short-selling techniques: quantitative, forensic accounting, thematic investing, fair value analysis, balance sheet weakness/financial distress, and exploiting market ecology
- the advantages and disadvantages of each short-selling approach, and their rates of success and failure
- where short-sellers get their information from
- how short-sellers try to practise risk management
and much more!
With a low-growth atmosphere and markets still nervous in the wake of recent financial crises, there has never been a better time to get on top of what it means to be a successful short-seller. Short Selling by James Clunie is the most time and cost-effective way to start getting ahead of other traders and investors now.

• Language: English
• Publisher: Harriman House
• Release date: Sep 20, 2013
• ISBN: 9780857193629

James Clunie

James Clunie works at Scottish Widows Investment Partnership (SWIP), where he is responsible for managing a UK equity long-short fund and a long-only fund. Previously, he was at the University of Edinburgh for four years, conducting research into stock lending and short-selling. He also set up and ran their Masters programme in Finance and Investment. Prior to this, Clunie worked at Murray Johnstone International, where he was head of asset allocation, and at Aberdeen Asset Management, where he was head of global equities. He graduated with a BSc (Hons) in Mathematics and Statistics and recently completed his PhD on indirect short-selling constraints, both at the University of Edinburgh. He is a chartered financial analyst.

Book preview

Short Selling

An evidence-based introduction

by James Clunie

Contents

Introduction

1. Common Approaches to Short Selling

2. Short-Selling in Practice

3. Final Thoughts

New Thinking on Market Volatility

References

Publishing details

Introduction

TRY DESCRIBING SHORT-SELLING to an intelligent lay-person: they will probably stare back at you incredulously, as if you have just invented some fantastical story. By contrast, if you were to read a series of academic articles on asset pricing, short-selling would seem like the most natural of financial activities, on a par, say, with buying a bond.

In reality, of course, short-selling is neither fantastical nor entirely natural. It is, however, a fundamental market activity that can be used for a variety of purposes. For example, it can allow a trader to reflect a negative opinion on a security price; it can form one leg of a risk-arbitrage trade; and it can be used to assist in market-making.

This book is primarily concerned with short-selling as an expression of a negative opinion on a security price. I will refer to this type of activity as ‘speculative’ short-selling, so as to differentiate it from hedging activities. It is designed to generate a profit in absolute terms, or to earn a spread relative to some other security (or index) that is held long. As a by-product, short-selling can assist in keeping market prices close to some measure of fair value, although this needn’t always be the case – there is a rich literature on predatory trading and manipulation that shows how speculative short-selling can move prices away from fair value (see, for example, Shkilko et al., 2012; or Coval and Stafford, 2007).

Speculative short-selling is risky and should not be undertaken lightly. Fortunately, there is plenty of theory and evidence to guide short-sellers in their work. In this book, I aim to summarise the current state of knowledge about short-selling, and to supplement this with some experience gained as a practising short-seller. What should short-sellers