For all the hubbub about short-selling, hedge funds, etc., there seems to be not much written about it. http://www.amazon.com/s/ref=nb_ss?url=search-alias%3Dstripbooks&field-keywords=short+selling&x=0&y=0 The Fabozzi book seems to provide an academic theoretical background but the other books seem to emphasize technical analysis. Do I need to teach myself basic technical analysis first (Magee, Murphy) to begin to intelligently apply short selling?
I think most short selling is derived from fundamental analysis first, then potentially apply technical trading rules to find best enter point.
Not instructional per se, but given all the misinformation flying around (including on this board), this should be required reading for everyone here: http://jeffmatthewsisnotmakingthisup.blogspot.com/2009/10/jim-chanos-for-sec-chairman.html
Thanks for the input. It doesn’t surprise me that O’Neil (Investor’s Business Daily) has a book out on technical analysis for short selling. I know nothing about technical analysis though, so I guess I have to get on to that.
I think most managers “think” they know how to short but many, many L/S managers are not good at shorting. They think that a short will just be those that don’t fit into their longs, but shorting isn’t as easy as one thinks. I love a L/S manager that has a seperate Short-biased/short-only fund. just my .02.
For shorts using financial analysis, I think the best books are found if you search for “financial warnings” or red flags. I personally think Financial Shenanigans is one of the best ones out there. It gives you an idea of what to look for and I think the last chapter is devoted to what you should specifically screen for. I think it’s a good basis, but with shorting (in my opinion) you need a combo of financial/tech.
http://www.amazon.com/Financial-Warnings-Implementing-Corrective-Strategies/dp/0471120448/ref=sr_1_1?ie=UTF8&s=books&qid=1254781293&sr=1-1 Financial Warnings at $140 is pretty pricey, but it seems like an effective tome. Financial Shenanigans and Creative Cash flow reporting was often on my analyst’s desk (at a small cap/micro cap L/S hedgefund).
I work at HF. We short to hedge other exposures. Suppose XYZ had an event on Dec 12th. Implied volatility seems mispriced as Nov Options were priced at 48 vol and the Dec implied was 42. We may buy a calendar spread, and then delta hedge our position (shorting stock or buying stock depending on our options positions)… I would say L/S equity is very very difficult and timing is everything… I would argue the sharpe ratios are very low relative to other strategies.
Thanks. I just remembered the CFE (Certified Fraud Examiner program) and found this thread about a new hedge fund analyst trying to find advanced accounting books for “financial shenanigans”. I’ve also heard of the CFE being valued by hedge funds because of their training in forensic accounting. The CFE books aren’t too bad- 2,000 pages in total (smaller than one level of the CFA) and I found a dealer that is selling them for $200: http://www.analystforum.com/phorums/read.php?1,912036,912050#msg-912050 "I finished the CFA last year and moved from the sell-side to a hedge fund about six months ago. I don’t have an accounting background, but it seemed fairly easy to pick up when I got into the industry – my accounting skills were at an acceptable level for the sell side and the CFA, but this is a whole different ball game. Specifically, we spend a good amount of time on the short side trying to uncover fraud and understand when a company is about to blow up. On the long side, it might be looking at the probability of bankruptcy of a particular company – i.e., does it survive? what should the cash burn model look like? etc. This is considerably more involved than the “management guided” earnings models you see coming out of the sell side (mostly useless). " But I am still unsure what are the most in-depth and effective “practical” tomes on forensic accounting. Should I go for the CFE books or the two tomes by “Financial Warnings” or “Guide to FRA” (same authors) book? (500-600 pages). Or something else. http://www.amazon.com/s/ref=nb_ss?url=search-alias%3Dstripbooks&field-keywords=forensic+accounting&x=0&y=0 Textbooks on forensic accounting, and I’m confused now. Before I build a small self study program to learn how to short effectively, am I doing this right? Theoretical background Short selling + entry point technical analysis + short selling books + forensic accounting
I’m looking at this and wondering…is this body of knowledge mainly for internal accounting strategies and not really for the outsider (investor?). So maybe elements of the CFE are not that appropriate for distressed analysis. http://www.amazon.com/Fraud-Examiners-Manual-Association-Certified/dp/1889277118/ref=sr_1_1?ie=UTF8&s=books&qid=1254793590&sr=1-1 This 2,000-page guide is divided into four main sections: Section I: Financial Transactions and Fraud Schemes: Describes hundreds of fraud schemes, as well as providing information about basic accounting concepts and managers and auditors responsibilities to detect fraud. Section II: Law: Focuses on the statutes and common law principles involved in prosecuting fraudsters through both the criminal and civil systems, as well as legal pitfalls you may encounter in conducting an investigation. Section III: Investigation: Provides the basic tools and techniques necessary to gather information and evidence when conducting a fraud examination and identifying perpetrators. The appendix contains a sample fraud examination report, fraud examination checklist and sample engagement and opinion letters. Section IV: Criminology and Ethics: Discusses why people commit crime and what can be done to stop them, including developing corporate compliance programs. It also includes fraud statistics and analyses of organizational and occupational crime.
would appreciate input very much, many thanks in advance.
The manual you linked to sounds more for auditing or possibly internal uses. Based on your first post, I don’t think this will help you out too much. We short names based off of financial analysis and we look for red flags/aggressive accounting techniques, etc. Here are the books I use and they may be helpful for you: Financial Shenanigans, Creative Cash Flow Reporting (basically search all the books by Mulford & Comiskey), the Financial Numbers Game is decent, I just started Guide to Financial Reporting & Analysis and so far I think it’s great, Hidden Financial Risk: Understanding Off Balance Sheet Accounting is okay but the others are better. Most of these books do overlap a ton (you will read about the same companies multiple times), but I’ve learned a great deal from each one even if some of it is redundant. If you’re looking to short based of financials/fundamentals then I would pick up the above books.
I think I’ll get these: Financial Shenanigans, Creative Cash Flow Reporting, Guide to Financial Reporting & Analysis “Financial Warnings” is shorter than guide to FRA, pretty expensive, and seems to be just an older text.
I just got Guide to FRA and yes, it is indeed great. Much better and more practical than the CFA FSA IMHO. Again, many thanks for the recommendation.