Very cool project. You didn’t mention shorting stocks that CAPY thinks are way overvalued, are you opposed to that? On top of maybe finding alpha perhaps you could justify buying less index puts and still sleep soundly.
Thanks Peter, I agree with the thought. Many funds do exactly this -- think Voss or any number of the long/short value funds. The idea is obvious: if there's alpha on upside there's alpha on downside. The best version of this is expected return ~0 on short book but beta down on long book; eg Voss is like 140 long / 80 short iirc which is manageable leverage and they've had a 15% CAGR. Sounds amazing. Practically though I don't do it, mostly because of brain space, the regulatory complexities of shorting and edge cases. You usually need ~50 names to short so it's a bigger basket and then matching up your factor exposures is really hard. You can get anti correlated factors in your long/short book that blow up; eg you're net short a bunch of dumb momentum factor names and long value factor and before you know it momentum factor is up 40% YTD and value is down 5% and you've created an exogenous source of blowing up. So I have passed on this for now
Very cool project. You didn’t mention shorting stocks that CAPY thinks are way overvalued, are you opposed to that? On top of maybe finding alpha perhaps you could justify buying less index puts and still sleep soundly.
Thanks Peter, I agree with the thought. Many funds do exactly this -- think Voss or any number of the long/short value funds. The idea is obvious: if there's alpha on upside there's alpha on downside. The best version of this is expected return ~0 on short book but beta down on long book; eg Voss is like 140 long / 80 short iirc which is manageable leverage and they've had a 15% CAGR. Sounds amazing. Practically though I don't do it, mostly because of brain space, the regulatory complexities of shorting and edge cases. You usually need ~50 names to short so it's a bigger basket and then matching up your factor exposures is really hard. You can get anti correlated factors in your long/short book that blow up; eg you're net short a bunch of dumb momentum factor names and long value factor and before you know it momentum factor is up 40% YTD and value is down 5% and you've created an exogenous source of blowing up. So I have passed on this for now