Time and again, research has illustrated that, throughout the market cycle, the tug-of-war between “good” versus “bad” fundamentals is eventually resolved when, as is inevitable, “hope stocks” with weak underpinnings fail, while attractively valued, quality companies grow at a rate above their peers. This differentiation of “good” versus “bad” fundamentals plays a key role in the identification of candidates for the short portfolio as well as candidates for the long portfolio.
The goal of such a short position is to blend the flexibility typically associated with hedge funds into a traditional equity approach. This allows an investor to find additional alpha and mitigate risk throughout various stages of the market cycle.
David Schulz is the president of Convergence Investment Partners.