Kass: In Defense of Short Selling

In summary, short selling and hedging seem to me to be a necessity in an increasingly uncertain world. After all, farmers do it, oil exploration companies do it, miners do it, even property owners do it by selling forward with long-term leases.

Moreover, short selling creates portfolio stability and a hedge against the inherently positive bias of analysts, managements and even human nature. Rather than being a mug's game, I have concluded that short selling is a useful tool that can provide profits in almost any market setting.

From my perch, the construction of a short is almost as important as the short itself, especially given the asymmetric risk/reward, which provides investors with an opportunity to capitalize on short-selling opportunities with some degree of comfort. This can be accomplished by buying puts or, as I like to do, through purchasing out-of-the-money calls as protection against the short (and allowing us to define risk). This strategy also serves to buy time for the short catalysts to develop.

One should never be obsessed with short selling or any specific investment strategy, but given that there is little permanent truth in the markets and given the aforementioned factors that will likely weigh on global economic growth, I have concluded that short selling is a necessary part of an investor's repertoire -- or at least mine.

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