According to MarketWatch, the independent short idea research firm Behind the Numbers is launchig its own hedge fun later this year:
Behind the Numbers, an independent research firm known for warning investors about potential problems at public companies, plans to launch a hedge fund in July.
To be called “The Short Fund,” the hedge fund intends to short 10 to 15 companies while taking long positions in five to eight companies, according to BTN President Jeff Middleswart, who will run the fund.
“We are here primarily to identify weak companies and short-sell them,” the firm said in a pitch document obtained by MarketWatch.
Hedge funds focused on short selling have been liquidating after the stock market’s surge since March 2009 burned them. Industry tracker HedgeFund.net saw seven short-biased managers drop out of its index in 2010, leaving 24 funds focused on the strategy. Only four short sellers report to the Strunk Short Index, down from 15 in the mid-1990s.
In an interview, Middleswart said his “basic goal is to reduce total risk” for investors. He hopes to raise at least $50 million this year.
The Short Fund will not trade excessively or look to profit on a one-time quarterly earnings miss, instead taking a longer-term approach.
For instance, short candidates could be companies that BTN thinks are undergoing a structural business decline, those where the dividend is at risk of being cut, or those where cash flows and revenues are falling.
Long positions could be taken on companies that are turn-around plays and companies that may significantly grow their dividend in the near to mid term. Ideal candidates would be companies BTN warned investors of in the past and knows well.
The goal is to “be an actual hedge fund,” BTN said in its proposal paper. “Too many funds try to be everything and trade currencies, credit defaults, microcap stocks . . . “
As fund managers re-evaluate their usage of and spending on outside research providers, we would not be surprised if some other reputable alternative research shops go into fund management themselves. One potential issue for BTN to deal with, should it continue to publish its research products, is the potential for conflicts of interest between the research and asset management parts of the company. This may raise some client concerns. However, they would hardly be the first research company to be involved in fund management, and we feel that with sufficient compliance controls and transparency with clients, such concerns can be overcome.