Friday, 24 October 2014
Last updated 17 hours ago
Apr 20 2010 | 9:02am ET
Shannon Collins, a fundamental-based, concentrated stock picker, launched YX Funds in August of 2005. The vehicle is a short-only hedge fund, one of only a few dozen short-only funds in existence.
Collins, who runs the fund out of Dallas, Texas, recently spoke with FINalternatives' Deirdre Brennan about the challenges of running a short-only vehicle, the negative—and he believes unfair—perception of short-sellers, and what short-sellers really bring to the marketplace.
Who would invest in a short-only fund, and why?
My investors are typically very large institutions and they use me as a tool in their portfolios. Folks either want to decrease their beta by having a short seller, or to increase their alpha by having a short seller that allows them to increase their gross. So my investors are large, sophisticated institutions—fund of funds, endowments, foundations—placing fairly large amounts. My average investor has about $50 million in the fund, and I don’t have any individuals in the fund.
Is it common to have a short-only fund?
No, it is very uncommon, mostly because it is a very difficult business model. And historically most short-funds have met with an untimely demise, but I’d say that is lessening now. I suspect there are less than 50 short-only funds. There are a few over a billion and the rest are probably $250 million or less.
Last year was really two different markets – how did you fare through the extreme swings?
The short answer is that we fared pretty well. My goal for my investors is to generate alpha so when the market is roaring as it did in the last three quarters of the year, and I’m 100% short, it is incumbent upon me to find names that aren’t going with the trend, and we did a good job of that.
In the months that the S&P was up, we had alpha of about 20%, and in the months that the S&P was down, we had alpha of about 5%. So, all in all, about 25% of alpha, and of course the market was up 26.45% for the year, so given that we had 25% alpha, on an absolute basis we were down 1.5%. Now, someone may hear that and think it [isn’t good], but I am almost positive that I was the best performing short-only or short-biased fund last year, and I outperformed the average short-biased fund by 20%.
Lately the market has been strong, does that make your job a lot tougher?
It does. The more momentum the market has in an up direction, the more difficult the job becomes because we are concentrated and fundamental based. We are trying to have catalysts occur on specific stocks to generate a move down in price, and with momentum in the market you can still have catalysts, but their impact on stocks is much less than in say, a level market or a slightly down market.
What about investment interest? Is it tougher to raise capital now that things are going well in the markets and here you are with a short fund?
No. The higher the market goes the more interest we get because everyone wants to time their investment…people want to hit the top and then they want to decrease the overall exposure of their book, and short-sellers are a good way to do that.
How do you go about raising capital? Do you have an in-house investor relations person or do you use a third party marketer?
I have hired Credit Suisse as my exclusive placement agent. They are the largest placement agent and they take on a limited number of clients, and I’m glad to be one of those.
Do you think short-sellers get a bad rap in the media?
I don’t want to sound like Lloyd Blankfein [laughs]….but there is an overall bias in the market against short sellers, there’s no doubt about that. I’d say 95% or more of the people out there want stocks to go up. It is good for everyone. Our role [as short-sellers] is to bring efficiency to the market, and what we really do is we uncover situations that other people don’t. If it is a fraud, we try to uncover the fraud. If it is a business issue, we try to make people aware of it. In doing so, we try to short circuit those situations so they don’t get bigger than they are. If we catch [the fraudulent companies] at a $250 million market cap instead of a billion dollar one…then there is $750 million that is not going to get lost by future investors. So, we actually see ourselves as doing something good for the market.
How does the current regulatory environment affect your fund?
I’m actually in favor of most regulations that came out post 2007 and 2008, like getting more strict on naked short-selling and modifying the uptick rule. In fact, I think disclosure of positions is fine—provided that it is not disclosure to the public, only to the SEC. The more we can do through regulation to dispel some of the myths, I think that is good for short-selling.
Are you a sailor? How did you decide upon the name YX Funds?
I am a sailor. My dad is from Boston and he was a signalman in the Navy in World War II. Back in the olden days when you hoisted the two flags, Y over X, that meant war was declared. So if you had a ship coming out of England and one coming from the US and they passed each other, they couldn’t talk to each other so they would communicate by raising the flags, and one would tell the other ‘war is declared’ with France, so the ship would know to be careful and to avoid any French corvettes, for example. So, it’s kind of an inside joke—I call it my juvenile inside joke—declaring war on our target companies.
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