Several skills important for shorting stocks say hedge funds - Part 2 - Featuring Richard Travia

Richard Travia, Tradex
Few investors are truly comfortable being short. That goes for individuals as well as institutions. As investors we simply are not wired to approach short selling with such ease.

But as allocators in a performance-driven world, being a talented and aggressive short-seller is a necessary trait that is very much part of our DNA - akin to survival skills in the ‘kill or be killed' investment jungle.

Tradex has historically made some of its best returns being short various assets classes, such as subprime mortgages, high yield corporate debt and equities, to name a few. A certain amount of aggressiveness was needed to pull off these trades.

We feel aggressive, contrarian thinking should be an important part of every investment process and thesis and its development should help to build and support the short or long side of any trade.

Without understanding the bull and bear cases, one might find yourself being fed to the wolves.

While timing is always important - and gut feel plays a large role in that - a thoroughly researched investment case where true asymmetry exists can help offset the need for perfect timing for investors that have lost their crystal ball.

Our favourite types of short trades have mathematical asymmetry on their side. Mathematical asymmetry is about more than having a strong opinion - it means there are factual and mathematical limits to the losses and the probability of a gain is skewed positively.

We currently see shorting high yield corporate bonds as a mathematically asymmetric opportunity that needs to be pounced on.