How to pitch a short in a hedge fund interview

Ask a room of candidates to pitch a long and most will manage something sensible. Ask for a short and the quality drops fast. People pitch a long in reverse: “this company is bad, so the stock will fall.” Interviewers hear that and know the candidate hasn't thought about how shorting actually works.

A short is not the mirror image of a long. The maths is different, the costs are different and the timing matters far more. A good short pitch shows you understand all three.

Why shorts are harder than longs

On a long, the most you can lose is what you paid and the upside has no ceiling. On a short it's the other way round. The best a short can do is the stock going to zero, which makes you 100%. The worst has no limit, because there's no limit to how high a share price can go.

Position size works against you too. When a long goes up it becomes a bigger part of the portfolio, so your winners grow. When a short goes against you it also grows, so your losers get bigger just as you're being proved wrong.

Then there's the cost of carrying it. You borrow the shares to sell them and you pay a fee to the lender for as long as the position is open. You also pay any dividends the company declares. A long can wait years for the thesis to play out. A short pays rent every day it waits.

Finally there's the squeeze. If lots of funds are short the same stock, any good news sends them all to buy back shares at once, which pushes the price up further and forces more of them out. You can be right about the company and still lose money because the trade was crowded.

What a good short pitch sounds like

The structure is the same as a long: the call, the variant view, valuation, catalysts and risks. The difference is that a short needs a sharper catalyst and an explicit view on the costs.

Notice what this does. It names a specific thing the market has wrong. It gives evidence you could check in the accounts. It names a date when the market is likely to find out. It addresses borrow and crowding before the interviewer has to ask.

Catalysts matter more on the short side

“The company is overvalued” is not a short thesis. Overvalued stocks can stay overvalued for years and you pay borrow the whole time. Interviewers want to know what will make the market change its mind and roughly when.

Good short catalysts tend to be concrete: a results date where a weak number becomes hard to hide, a refinancing the company needs to complete, a contract renewal, a covenant test, a lock-up expiry when early holders can sell. If your catalyst is more than about a year away, expect to be asked why you'd hold the position until then.

Know your numbers on crowding

You should be able to say how much of the free float is sold short and how many days of normal trading it would take for short sellers to buy it all back. That second number is called days to cover. If 6 million shares are short and the stock trades 400,000 shares a day, days to cover is 15. A high number means a squeeze could be painful.

Pick a short you can defend

Avoid the famous, heavily shorted names everyone talks about. They're crowded, expensive to borrow and the interviewer will have heard the pitch many times. A mid-sized company with a specific accounting or demand problem is better material. So is a decent company priced as if nothing could go wrong.

And avoid shorting something just because you dislike the product. The question is never whether the company is good. It's whether the price already assumes it's better than it is.