Monday, 1 May 2017
Last updated 2 days ago
Jan 10 2014 | 7:29am ET
Old-school, Marin County-based short-seller Dave Davidson received a nice Christmas gift this year: a $10 million investment from Crayna Capital.
Davidson, who runs the $60 million ShoreLine fund, describes himself as “the last man standing” in the short-bias space. He started in the finance business in 1984 as a salesman with institutional broker Paine Webber and later founded his own brokerage firm in San Francisco (Pacific Growth Equities) before beginning to trade for himself in 1990. Since then, he told FINalternatives in a recent interview, “I've been on my own or running other people's money.”
Davidson's depiction of himself as the “last man” in the stocks-only short-bias space is only a slight exaggeration: Hedge Fund Research reports that due to poor performance and other factors, there are only about 20-25 short-bias funds left in the market and, as of Q3 2013, those funds were down 4.77%. (On a slightly brighter note, after seeing outflows in 2011, 2012 and the first two quarters of 2013, short-bias funds attracted $117 million in the third quarter, by HFR's calculations.)
Davidson, by his own admission, had a bad 2013. His net return from inception (2000) now stands at 9.13%, compared to 55% through end-2012. His assets under management have declined from their pre-crisis peak of $200 million. But his good years have been remarkably good (like 2008, when he was up 56.86%).
Crayna Capital founder (and Simple Alternatives alumnus) Bruce MacDonald said they were looking for a short-bias manager on behalf of a contrarian client who believes the very dearth of funds like Davidson's proves they are an attractive investment. They chose ShoreLine, said MacDonald, because they liked Davidson and his experience and his strategy:
“We really liked that he focuses on highly liquid stocks,” MacDonald told FINalternatives. “Short-selling is very, very difficult for a lot of reasons, but one of them can be that shorts can get really popular and there can be really violent moves against you, a.k.a. short squeezes, and he really minimizes the risks of that with his liquid strategy and that's really important...Since the cards are stacked against you as a shortseller, to the extent that you can eliminate some of those risks, that's great.”
A liquid stock, in Davidson's estimation, trades over 1 million shares a day. His focus is big market-cap stocks of the S&P 500 and NASDAQ 100 variety.
“My strategy is very simple,” he said. “It's only stocks, there's no options, there's no private equity, there's no fixed income, it's just straight stock management and I actively manage it on a daily basis...”
“The stocks that I get involved with are very easy to borrow and they have very negligible borrowing costs versus the other guys who, a lot of them, are trying to identify the next fraud that's going to go to zero, which incurs very high borrowing costs.”
Davidson said once he's identified the stocks “most pension funds and mutual funds and institutions all own because they've all been the big winners,” his selection process is based on a predictive indicator—price and volume action.
“Price and volume anticipates change,” said Davidson. “Change in the fundamentals or change in the marketplace itself.”
As an example, he points to Whole Foods, which, as he said, has “had a huge run over the last number of years.”
“They've recently missed their earnings estimates and the stock started heading down and I'm short it. And now today, it's breaking down even further, and so what I do is, when the fundamentals continue to deteriorate and the stock price action continues to work...the way I think it should, then I will add to that position.”
Whole Foods is just one of a number of consumer discretionary firms he's currently shorting along with BestBuy, Dollar Tree and Lululemon. Davidson said he's also short “a package” of REITs; some industrial stocks, including as AGCO; some technology names, including Apple Computer; and some emerging market ETFs, including Brazil and Mexico.
Davidson,, who said he is “all dressed up—I'm SEC registered, I have dual prime brokers, I have the auditors, I have the New York law firm, I have the third-party administrator”—charges fees of 1 and 20, has a minimum investment of $2 million, thinks his strategy is scalable to $1 billion “easily” and believes his fund should be part of an investor's hedging strategy for a long portfolio—and especially so in the current market environment.
“We're in this new quantitative-easing experiment, money-printing experiment that's done nothing but pile debt on top of debt on top of debt and it's truly unsustainable, so I would say to you that I've been through these periods, I've come out way ahead and yeah, you've lost some money waiting for this next bubble to pop, which I think is going to be the biggest of all that we've seen over the last 12-plus years.”
“I think that, my experience—and I've been in this for the long haul and my track record demonstrates it—you just got to have me as a part of your portfolio. In fact, like I just said, there's not very many people left doing it.”