Timing the Turn

Monday, October 17th, 2022   Categories: , ,

Think like a hedge fund with a short-equity position

At the bottom of every bear market, there is a moment when equities turn, but most long-only managers are too risk-averse to believe it. Our approach does not try to anticipate this, but there are techniques we can use to spot the opportunity sooner. The trick is to think like a hedge fund manager with a short position in equities. In every bear market since 2000, the window for a risk-efficient short position in equities has opened weeks or months after our long-only models have got to an underweight position. This window also closes well before our long-only model rebuilds its position in equities. At the bottom of the cycle, the marginal buyer is the person with a short position.

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