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

Interpreting risk

On the short side, the markets do not cooperate. Market Darwinism dictates that short sellers become exceptional risk managers. In the coming sections, we will explore three vastly underrated risk metrics and their source code. Calibrate risk using any or all of them, and you may have a long-term fighting chance. When asked about risk, market participants usually do one of two things.

The first one is to roll out a battery of metrics. They start with the Sharpe ratio, add a measure of tracking error, spice it up with Sortino, a teaspoon of Treynor, a drop of Jensen Alpha to make it look good, apply the finishing touch with information ratio, and it is ready to serve to a bunch of incredulous clients, who pretend to love the number "haute-cuisine." The indiscriminate proliferation of metrics tells us one thing: we are hardwired to not understand risk.

The second thing market participants do is to drop into dissertation mode. They tell...