Book Image

Algorithmic Short Selling with Python

By : Laurent Bernut
Book Image

Algorithmic Short Selling with Python

By: Laurent Bernut

Overview of this book

If you are in the long/short business, learning how to sell short is not a choice. Short selling is the key to raising assets under management. This book will help you demystify and hone the short selling craft, providing Python source code to construct a robust long/short portfolio. It discusses fundamental and advanced trading concepts from the perspective of a veteran short seller. This book will take you on a journey from an idea (“buy bullish stocks, sell bearish ones”) to becoming part of the elite club of long/short hedge fund algorithmic traders. You’ll explore key concepts such as trading psychology, trading edge, regime definition, signal processing, position sizing, risk management, and asset allocation, one obstacle at a time. Along the way, you’ll will discover simple methods to consistently generate investment ideas, and consider variables that impact returns, volatility, and overall attractiveness of returns. By the end of this book, you’ll not only become familiar with some of the most sophisticated concepts in capital markets, but also have Python source code to construct a long/short product that investors are bound to find attractive.
Table of Contents (17 chapters)
14
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15
Index

Gross exposure

Gross exposure is the absolute sum of long and short books. Selling stocks short generates cash, which can be used to enter additional long positions. In theory, leverage could be increased ad infinitum. In practice, prime brokers limit leverage to 3 or 4 times to limit their counterparty risk. Nobody wants to deal with margin calls at the first sign of a market hiccup.

Gross exposure has a direct impact on:

  • Liquidity: The higher the leverage, the bigger the positions. This has a direct effect on market impact. This is especially felt on the short side, as the 2007 quants attest.
  • Volatility: Leverage magnifies the volatility of returns.
  • Performance: Leverage magnifies returns: A paltry 0.1% at low leverage can be juiced up to 0.5% and so on.
  • Concentration: If the objective is to keep volatility low, the number of names should move in tandem with leverage: higher gross means more names and vice versa.

Gross exposure is ultimately...