Any Shorting Methods that Beat Buy-and-hold?

A reader asked: “I have never heard of a shorting method that outperforms bonds or stocks over a horizon of greater than 5 years. Do you know of any?”

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The valuation-based method described in “Modeling the Logic of Valuation-motivated Short Sellers” is a candidate, but the sample size and sample period in that study are not long enough to assure performance across decades.

There are a few other candidate methods  that use hedge portfolios in their analyses (such as “Combining Short Interest and Analyst Recommendations” and “The Interplay of Short Interest and Institutional Ownership”). It is difficult to compare hedge portfolio performance with buy-and-hold performance because of the complexity of capital requirements for the former.

As always, investors should take care to ensure such analyses account for (or have the margin to withstand) data snooping bias and reasonable trading friction.

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