Money managers are making sure they go long on short talent before bringing 130/30 products to market.
Portfolio managers and traders with shorting experience on their resumes are in higher demand as traditional, long-only firms look to short stocks for the first time with the launch of so-called short-extension strategies.
“The whole short world is like the underground,” said Alexander J. Thomson, chairman, president and chief executive officer of Thomson Horstmann & Bryant, Inc., Saddle Brook, N.J. “You have to get your information a different way.”
THB launched a small-cap fundamental 130/30 strategy this month. A small shop with no previous products that used shorting, the top brass had to hire a portfolio manager and trader with that experience.
William W. Bryant III, the son of William W. Bryant Jr., a principal at the firm, was hired in November 2006 to be a portfolio manager and senior research analyst. He worked previously at Washington Asset Management Co. in New York, where he was a co-portfolio manager for a long/short hedge fund. Mr. Bryant manages the short side of the 130/30 strategy.
THB also brought in Ellen Dedrick as trader. She worked previously at Saranac Capital Management, LP.
Thompson, Siegel & Walmsley LLC, Richmond, Va., which launched a 130/30 strategy in July, also brought in new staff to handle the nuances of shorting required for these strategies.
Recruiters say the trend will continue.
“The traditional world has the need to hire these people for 130/30 products and they have the money for it,” said Jacob Navon, partner, Westwood Partners LLC, New York.
Mr. Navon explained that many of the managers who have never used shorting have just launched their 130/30 products in the past year to get a track record going.
Those managers open the strategy with a little bit of seed money, and use their fundamental or quantitative stock ranking methods to decide which stocks to short. At first, the managers do not need shorting expertise in house because the small amount of money limits the amount of stocks they have to borrow.
“If you’re shorting 100 shares of a stock, you can always find someone to loan it to you,” Mr. Navon said. “When clients dump money on you, you realize there are all these nuances of shorting (a larger number of stocks) and you need to hire somebody.”
Different skills
THB brought in staff with shorting experience because firm leaders knew the shorting involved with 130/30s required a completely different skill set than going long with stocks.
“There’s more technical analysis used in making the short decisions than the long decisions. They talk to different people,” THB’s Mr. Thomson said.
Getting negative information on stocks to short also requires quicker reactions, explained Mark Tyler, a portfolio manager at TS&W.
“Experienced short investors understand that company management is working to fix the problems they’re having … good shorts stop being good shorts at some time,” he said.
In anticipation of their 130/30 offering and a market-neutral strategy, the firm brought in four new portfolio managers and traders to help with those strategies. The long-short team manages both of those strategies.
Some of the new hires include Matthew Cullen, an analyst on the long-short team who joined from Clovis Capital Management at the beginning of 2006, and Patrick Schubmehl, who joined when they brought Mr. Schubmehl’s own hedge fund, WPS Capital Management, in-house. (TS&W had bought WPS Capital at the beginning of 2006.)
“We put together a portfolio management team with 18 years of collective shorting experience and 11 (years of shorting experience) on trading,” Mr. Tyler said. “We thought that was the key — to address the nuances of shorting and not just throw the short positions on top of the long positions.”
Experience in shorting will be crucial to money managers when they try to solicit their strategies to institutional investors, said Robert F. Hill Jr., principal and chief executive officer of Shenandoah Asset Management LLC, Richmond, Va. His firm launched a 130/30 in June, but the firm already had shorting experience because it managed a market-neutral strategy for a client for seven years before that strategy was converted to a 130/30.
Mr. Hill said experience managing shorts is high on the checklist of consultants who consider 130/30 managers for their clients.
“Public opinion would say you need experience with shorting. You have to monitor and stay on top of your shorts more than you do your longs. ... Your loss is potentially unlimited,” he said.
