Heavily shorted stocks rallied in 2020. How did short-term reversal do?
Not quite as bad:
Jan +2.71%
Feb -2.35%
Mar -11.87%
Apr +15.58%
May -3.09%
Jun -1.91%
Jul -3.27%
Aug -2.27%
Sept +0.42%
Oct +0.69%
Nov+3.23%
Dec -3.06%
(gross returns, $-neutral)
1/ The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s (John Brooks)
“As a people, we would rather face chaos, making potsfull of short term money, than maintain order and sanity by [turning away new business] and profiting less.”
2/ "Interest rates were at near-record highs, strangling new housing construction and making industrial expansion impractical. The dollar was in trouble, worth many billions more than the national gold hoard. One hundred or more Wall Street brokerage firms were near failure.
3/ "In May 1970, an equally-weighted portfolio was worth half of what it would have been worth at the start of 1969.
"The high flyers that had led the market of 1967 and 1968—conglomerates, computer leasers, far-out electronics companies, franchisers—were precipitously down.
Paper 1 (abstract): Based on lots of assumptions and this particular data set, we find that lockdowns don't work.
Paper 2 (abstract): Based on lots of other assumptions and a different data set, we find that lockdowns do work and strongly recommend them as policy interventions.
Paper 3 (abstract): Based on our own arbitrary criteria, we find that lockdowns may have been somewhat effective but were not worth the cost.
Paper 4 (abstract): We find that lockdowns were somewhat effective in saving lives and strongly recommend them as policy interventions.
Applications might not be as obvious as they seem.
For example, long-dated options have optically high spreads but reduce the need for aggressive vol targeting when it's most expensive to trade the underlying. They also make it possible to rebalance into dislocated assets.
Momentum can become much lower turnover and more tax efficient when rebalanced differently:
One way to be a liquidity provider is to be an endowment: no leverage and infinite time to wait for convergence.
Another is to be simultaneously diversified/hedged, such that divergence has a payoff and allows you to hold on to convergence trades with very high expected returns.