Item — HN Reader

Bleecker Street Research is a hedge fund that has been shorting since 2014. They wouldn't be in business if they were only lucky once.

Shorts perform significantly more analysis than longs, as they have to have great timing in addition to being directionally correct.

In the article, Bleecker are not making any specific predictions, just explaining their reasoning for shorting this stock.

Their one prediction is "This is not a contained event…. I don’t know what happens."

Yellen has said she is monitoring a small number of unprofitable banks carefully.

From a market perspective, short interest in the regional bank ETF KRE has been rising steadily for a while now.

Looking at unprofitable banks with high implied volatility, the market seems to think First Republic Bank FRC is under some duress.

It is exceptionally costly to short FRC right now, but I imagine anyone with more than $250k in a single account is moving money out right now. Which is the definition of a bank run.

2 comments

> Bleecker Street Research is a hedge fund that has been shorting since 2014. They wouldn't be in business if they were only lucky once.

I disagree. Their model is similar to VCs in a way. Hedge funds don't care about the number of times they were correct vs. wrong, they care about the wins from the correct bets being more than losses from the bets that went wrong. It goes even further, if you think about what the point of hedging positions really is (which is essentially making a bet on something you actually believe the opposite of, as an insurance policy in case your main hypothesis goes wrong).

Just like with VCs, they don't expect most of their bets to work out. They just expect those bets that work out to bring in so much money, that the losses from the rest of the bets won't matter.

So yes, a hedge fund can be extremely successful and profitable, even if only 10% of their bet predictions end up being correct. It is all about what those bets are and how they are structured.

With that in mind, I am definitely still of the same take as the grandparent comment.

With all due respect, you have no idea what you are talking about.

A traditional hedge fund is the opposite of a VC. VC's want huge gains, which means huge volatility. Traditionally hedge funds minimize volatility rather than maximize returns. Traditional hedge funds are for those who care more about wealth retention during down times than increasing wealth during uptimes.

The maximum theoretical gain from shorting is 100%. A stock can only go to zero. If only 10% of your shorts are wildly correct and go to zero, you just made 10% on that one bet.

The maximum theoretical loss from shorting is infinite. Any one of the other shorts could blow up your fund if it went up 10x. Of course, this is a hedge fund, with risk management that would either hedge the risk or exit the position before it blew up the fund.

But shorting costs money. Especially if it's a popular short or if it pays a healthy dividend. Even if your stars align, and all the other 90% of short/long pairs just went sideways, neither generating a profit nor a loss, you are unbelievably lucky if you come anywhere close to the 8% a traditional index ETF returns over the long haul, with a 10% win rate on shorts.

> The maximum theoretical gain from shorting is 100%. A stock can only go to zero. If only 10% of your shorts are wildly correct and go to zero, you just made 10% on that one bet.

That's one way to look at it. A stock can only go down 100%. But shorting can make tons of money because:

a) stairs up, elevator down, it takes shorter amount of time to get the same price movement.

b) leverage, corollary of (a).

c) A stock going from 400 to 200 is a 50% move, from 200 to 400 is a 100% move, in terms of points its exactly the same so you earn the same amount.

No their model has nothing to do with VC. Maybe it would be useful if at least you read the definition on Wikipedia before trying to pass completely incorrect notions as truth?

https://en.m.wikipedia.org/wiki/Hedge_fund

You are missing the point I was trying to make. I was not implying that VC and hedge funds operate similarly or even have the same mechanisms.

I was trying to say that their success metric is the same: the total amount of dollars gained, not the number of bets on companies (VC) or the number of positions (hedge fund) that worked out.

But that is where you are wrong.

VCs can be wildly successful making 999 losing bets, as long as one bet is a 100 bagger. VCs are running off imperfect information, they don't know which horse will be a winner, so they spread their bets. The more bets the better.

Short hedge funds are betting that they know more than Mr Market, one of the most efficient pricing mechanism known to man. A long fund can be no smarter than a monkey throwing darts, and it still does well. A short fund needs to be the smartest person in the room. They go deep, to find an edge that no one else but them has spotted. So they are highly concentrated, because you just can't go that deep on more than a handful of companies.

To say a short sellers insight is not worth anything because they just got lucky once is incredibly... short sighted?

what incentive do they have to actually give out valid information about "their reasoning for shorting this stock?" they have a serious disincentive as a hedge fund to share their insight since someone else can now make the money that they would have made.