The World of Short-Selling Hedge Funds - WJS Blog

By Steve Eder

Kent Holden was one of a small number of investors for whom Friday morning’s relatively good jobs report wasn’t such good news.

Mr. Holden runs Holden Asset Management LLC, a small hedge fund dedicated to betting against stocks. As the Dow Jones Industrial Average fell 512.76 points, or 4.31%, Thursday, his fund surged nearly 5%.

Then, when he saw the job figures on Friday morning, he knew it probably meant giving back some of the money. He dubbed it “rally time” and braced himself as millions of others sighed with relief. In a day with lots of ups and downs, the Dow Jones Industrial Average ended modestly up.

All in all, it was an unusually good week for Mr. Holden, who since 2008 hasn’t had much to celebrate. As stocks rose in 2009 and 2010 during the recovery from the global financial crisis, his portfolio suffered big losses.

Since stocks peaked in late April, Mr. Holden’s portfolio was up about 20% through Thursday, he says.

Welcome to the shrunken world of short-selling hedge funds. The number of hedge funds dedicated to short-selling stocks was small to begin with, but the market recovery in 2009 and 2010 made for an “incredibly hard” environment for the ones that remained, Mr. Holden said.

“When it works, it works great,” Mr. Holden says. “But everything is skewed to the upside. . . . We always do our job, but often times we don’t get accolades for it. So it helps to have an up 5% day, certainly.”

Mr. Holden, 57 years old, works from offices in Stamford, Conn., where he monitors the markets and his investments on three computer screens, a television in the background. With pictures of yachts on the wall, the subdued space is a far cry from an adrenaline-infused trading floor.

Mr. Holden explains that he often holds his bearish positions long term, so he isn’t a prolific day-trader by any means. He made roughly 15 trades last week, he says.

He and his three-person team were well-positioned for the market carnage. The portfolio consists of about 85 trades against specific stocks. Positions are determined through fundamental research.

The bearish bets come in a range of sectors: consumer goods, industrials, materials, telecommunications—and even Chinese stocks. Stocks of companies that rely on consumer discretionary spending represent the largest part of the portfolio.

Mr. Holden believes last week’s steep slide will lead investors to more judiciously buy stocks, looking at their merits. He predicts there will be “less of this mad rush into anything with a stock symbol,” driving up the markets. “Investors are paying more attention to individual stocks,” he says.

Mr. Holden, who has done short-research for about 30 years, launched his fund in 2007. In 2008, as global capital markets were reeling, the fund was up about 34%, he says.

“It was great,” he says. “We did exactly what we were supposed to do and we helped our clients mitigate losses when everyone else was getting killed.”