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The Value of Short Selling for Symmetry

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Stockholm (HedgeNordic) – Stock-picking hedge fund Symmetry Invest has achieved a net-of-fees annualized return of 18 percent since its inception just over 11 years ago. Founder and portfolio manager Andreas Aaen attributes some of this success to the fund’s ability to short, saying “One thing is certain – Symmetry would never have achieved a historical return of 22 percent gross and 18 percent net over 11 years without the ability to short.”

While some prominent short sellers exited the scene due to challenges from the low interest rate environment and meme stock activity, why does Aaen see value in short selling despite risks being asymmetrically skewed against him? “Our long portfolio typically consists of defensive value stocks in the small-cap segment, where it is difficult to expect returns in excess of 20 percent annually,” explains Aaen. “Returns at that level are usually only achieved through extremely high risk, leverage, or similar, but at Symmetry, we have used shorts to achieve these returns with lower market risk than with a traditional portfolio,” he emphasizes.

“One thing is certain – Symmetry would never have achieved a historical return of 22 percent gross and 18 percent net over 11 years without the ability to short.”

Andreas Aaen, Founder and Portfolio Manager of Symmetry Invest.

Symmetry’s reports to investors highlight the fund’s success in shorting stocks over the past decade, with its short book outperforming the market in nine of ten years. “Only in 2021 did we fail to do so – but 2021 was one of the worst years in history to short ‘shit-cos,’” notes Aaen. “This also means that since the founding of Symmetry, we have had a positive return on our shorts, despite the overall market being in an uptrend during the same period,” he adds, dispelling the myth that shorting cannot make money in a rising market. “The illusion that ‘one cannot make money from shorts because the market rises over time’ certainly does not apply to us.”

“The illusion that ‘one cannot make money from shorts because the market rises over time’ certainly does not apply to us.”

Andreas Aaen, Founder and Portfolio Manager of Symmetry Invest.

The belief that shorting cannot be profitable because markets generally rise over time is one of the biggest misconceptions about short selling, according to Aaen. While it’s true that the stock market returns about ten percent on average over time, “what few people know is that the average stock does not,” says Aaen. “It is often a handful of winning stocks that end up pulling the entire market upward over time,” he emphasizes. The key to successful short selling is to avoid shorting the winners rather than finding the losers. “We do not need to find the losers in the stock market, we just need to avoid being short in the winners,” notes Aaen. With straightforward rules, this task is more manageable than commonly thought.

“We do not need to find the losers in the stock market, we just need to avoid being short in the winners.”

Andreas Aaen, Founder and Portfolio Manager of Symmetry Invest.

Short selling also provides Symmetry Invest with “both liquidity and the courage to be both aggressive and defensive at the right times,” according to Aaen. “Many of the dumbest decisions made on the long side are because people feel the need to be fully invested all the time,” argues the founder of Symmetry Invest. During market peaks, when good investment opportunities are scarce, investors often settle for subpar investment opportunities or take excessive risks. “However, if you have the ability to short, you can spend your time finding attractive shorts during periods when there are not many good long ideas.”

Conversely, maintaining a short portfolio enables investors to capitalize on market downturns. “It is when the market goes down by 20 to 30 percent and individual stocks drop by more than 50 percent that you can make the purchases that define your career in investments,” concludes Aaen. “The problem is that if you are already fully invested and are down 30 percent yourself – you do not have the ability to make these purchases,” he adds. A short book can mitigate losses, positioning an investor to weather downturns more effectively. “Having a short book as an investor means you might only be down 10 percent when everyone else is down more than 20 percent.”

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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