Gotham's Greenblatt: When (and how) to long-short invest

Jun 20, 2014 @ 12:00 am

Runtime: 3:50

Do you really understand long-short investing? There are plenty of ways to go long-short. Joel Greenblatt of Gotham and Michael Aronstein of Marketfield offer their perspectives.

Video Transcript

[MUSIC] Sure, when it comes to long-short investing, advisors really need to understand the strategies that they're following. What are you long? What are you short? The way we do it is we buy the cheapest stocks we can find and short the most expensive. It's pretty straightforward. And we balance our risks, to stay out of trouble. There's a lot of different things you can short. There's a lot of different things you can buy, but we're actually valuing businesses. That's what we do. So our definition of value investing is figure out what something's worth and pay a lot less, so that's what we buy. And the things that are most expensive relative to our assessment of value, those are the things we short. We try to balance our risks with diversity, not too much concentration and, and the, the relative volatility of the long and short side. That's what we do. So we understand that. There are plenty of other ways to go long-short that. I, I think people can find a place in their portfolio structure for a long-short based on the notion that the extent somebody can do having some short exposure in customer's accounts makes sense because markets are not unidirectional. There is what I call directional diversification possible when you're allowed to be on the short side of certain markets, and there are times at which that's almost a more compelling opportunity than the long-term accretion of value that occurs when you own something. Even though over a long period of time the bias ought to be toward ownership and the compounding of capital within an instrument mainly within an operating company, but sometimes, for within an asset that's, by nature, fairly static that you can accrue value within those. But no, there are times at which the world gets carried away with certain theses and it results in valuations for entire sectors that are really, really fragile and over done. And having a little bit of that on the short side can often insulate the rest of a portfolio from the effects when those things that are over done unwind. Well the question is, why do, are liquid alts so hot right now? And, and the answer really is, is very few advisors have them in their portfolio, so their clients generally have one, two, or three percent of their assets on average in these, and perhaps the right number is 10, 20 or 30%, not two or three. So, I think they just haven't been available. Good ones haven't been available. Now there's gonna be a lot more, and, once again, it's always caveat emptor. You know, not everyone's gonna be good except and probably most won't be good. So you really have to be selective, but they're a great opportunity for investors to get some diversification and, and higher returns. Now that's a tough question to ask me. Obviously, I have a dog in this fight, but I, I've always been of the belief that somebody managing someone else's money ought to find between say six and a dozen managers whom they trust. And across various styles that's, and perhaps across asset classes and just give the money to those people. And I think a among them, I think people who have some, on a conversance with the short side would make sense, and seeing as long-short equity is pretty much the only category in which you are going to get some short exposure, I think that tends to be somewhat the default application on that basis. [MUSIC]


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