As reported on Zero Hedge, constantly since 2012, going long the most shorted names remains the best alpha-generating strategy, outperforming the broader market by orders of magnitude. Bloomberg has followed with an article that notes that in the U.S. equity market, the worse a company’s finances, the better it’s doing. Stocks with the weakest balance sheets have climbed more than 8% in 2014 and 94% since the end of 2011, generating almost twice the gain in the S&P 500.
While some of this can be attributed to a systematic short squeeze, much of this can be attributed to the Fed's zero interest rate policy (ZIRP) and the perceived elimination of risk. The worst names have gone up more than the best names. That conceptual reversal, which has dominated most of the last five years, has been a burden for many long/short managers. Unless a manager holds a significant long bias, in many cases, the short names are overpowering the portfolio.