Paying someone to under perform the market

One link amongst several links at The Kirk Report is worth going through in detail, where James Altucher talks about how hedge funds are setting up long only funds.

Long-only is the new black in quest for ‘alpha’
By James Altucher

Published: January 22 2007 21:10 | Last updated: January 22 2007 21:10

In the past three weeks I had two funds of hedge funds and one $10bn family office based in Geneva call me and essentially say the exact same thing: We’re starting to look at long-only hedge funds.

“We’re tired of paying management fees to people who are guaranteed to lose money over time,” one of them told me, referring to investing in shortselling funds, or even long-short funds that have primarily lost money on the short side.
Another good friend of mine who has been an arbitrageur his whole career is looking at setting up a hedge fund focused on long-only in the energy space. “Long-only” is the new black. What’s the basic idea and is it a bearish sign on the markets if suddenly everyone cares about only going long?
First off, it’s not bearish at all. It’s smart. It’s very difficult to create alpha from shorting. In other words, when someone invests in a skilled shortseller they are hoping for two things: 1) when the markets are down the shortseller is up, and 2) when the markets are up, the shortseller is not down as much as the markets are up. This last condition is the “alpha”.
But here’s the problem: 99 per cent of shortsellers are incapable of doing it. As an example, the Dedicated Short Bias Index of the CSFB/Tremont hedge fund index was negative in 2001. What this tells us is that in a year with terrorist attacks, a dotcom bust, a recession and negative returns in nearly every market index, the shortsellers still couldn’t make money.

While most experienced traders know short selling is difficult way to make money, I am always surprised by the enormous popularity of bearish blogs and bearish commentators.The Ticker Sense prominent blogger sentiment Index has since its inception only had bullish sentiments couple of times. Some of these blogger even have newsletters and instituional services and they are subscribed to by hundreds. Imagine paying someone to underperform the market.