NY Securities Financing Forum: Q&A Quant - "The long and the short of it"

Rochester “Rocky” Cahan, VP of Deutsche Bank’s Global Equity Quantitative Strategy team kicked off the Forum’s hedge fund session with a presentation and Q&A around the team’s recent report: Signal Processing: The long and the short of it.

The results of the study are robust and provide independent evidence that there are profitable trading signals in securities lending and short interest data, primarily daily, global short interest data from Data Explorers.

“There is value in this data for long short investors, but what’s often missed is that there’s value for long only managers. Going underweight securities heavily borrowed does generate some alpha,” said Mr. Cahill.

The presentation addressed DB’s securities lending factor, known as the DBSL, which is based on Data Explorers data including days to cover, active utilization and percentage of shares available to borrow. Results show that testing of the DBSL provides consistent performance with low portfolio turnover. 80% of the test portfolio was consistent from month to month.

The signal is not adversely affected by convertible arbitrage and dividend trading at portfolio level. Although the signal is regime specific, showing greater strength in bear markets, it is slow to decay, with residual signal remaining after 12 months.

The report is a good primer for anyone contemplating the use of securities lending data in portfolio construction decisions.