Preface

"There is nothing more powerful than an idea whose time has come."

– Victor Hugo

Market participants always want industries to become more efficient: "cut the middle man," "cost-reduction," "rationalization."  We are finally getting a taste of our own medicine. Markets average long-term returns of 8% per annum. Yet, roughly 60% of professional fund managers underperform their benchmark, year in year out. 90% of retail investors blow up. The way we trade has clearly not been working. Despite all the bravado, the emperors of money have been parading naked. We collectively need to evolve if we want to survive this market Darwinism. Evolution does not take prisoners.

Global warming is a reality in the financial services. The glacier of actively managed money is melting. Mutual funds face intense pressure from exchange traded funds to lower fees. Fortunately, there has been a solution right under our noses all along, a terra incognita where mankind has never set foot.

If we were to stack all books about investing, trading, markets, on top of each other, trips to the moon would be a sad ecological reality. Yet, if we were to line up books about short selling side by side on a dinner table, there would still be enough room for a bottle of Côte-Rôtie, a divine northern Rhône valley Shiraz-Viognier wine, and a few glasses. Short selling is the key to raising and maintaining assets under management. When the markets tank, those who still stand up, stand out. Money may temporarily flow (and ebb) to those who shine in bull markets, but it will always gravitate towards those who perform in down markets. Investors may forget unimpressive returns, yet they will not forgive drawdowns.

Short selling commands premium fees. Suppose you add a short book to your endangered long-only mutual fund. From that day on, you can command premium management fees and even demand steep performance fees. You will enjoy more freedom in your mandate to trade exotic instruments, freedom to keep a higher cash balance, freedom to selectively disclose your positions. And the price of freedom is to learn to sell short.