Understanding concentration risk (sentiment) across long and short equity positions is one of the most important investment factors driving returns in today’s market— it’s also nearly impossible to quantify. Until now.

By combining S3's unique and comprehensive view of short interest with publicly available holdings data, we have verified the structural long and short dynamics of the market.

As a result, S3 Black Map shows you how concentrated your portfolio and positions are versus global markets.

What S3 Research Proves about Black Map Data

• S3 research proves that there are 10k+ concentrated longs and shorts globally

• Over time, these concentrated positions make money until they don’t—the drawdowns are severe

• Black Map shows passive and active flows that produce alpha and risk management signals that do not currently exist in the market

• Enhance existing models for portfolio construction with new alpha and risk management signals from S3 Black Map

Background: The Current Market Backdrop

• Understanding concentration risk (sentiment) across long and short positions is one of the most important investment factors driving investment returns in today’s market—it’s also nearly impossible to quantify. Until now.

• Passive/ETF Index investing has disrupted active management. There is more money chasing fewer stocks in a declining volume environment.

• Concentration risk (sentiment) as a driver of returns is a function of an Asset Manager’s investment time horizon.

• Black Map provides a total view of long and short positioning in the market.

How S3 Long/Short Interest is Differentiated

When you combine our Short Interest and our Analytics with all public ownership filings, you find a net view of the investment universe globally.

Data Collection

• Asset Managers: 24 Fund type entities, ~ 190k funds

• Company Long Filing Coverage: ~ 50k securities globally, across 108 countries

• Active vs Passive Management: based on turnover and entity type/cohort

• Short data is collected daily across 58 regulatory exchanges

Data Enrichment

• All data is Point-In-Time

• We have solved for nuances associated with the complexity of regulatory thresholds and regulatory environments globally where long/short disclosure is available

• We have a robust security master for mapping and an automated workflow to handle corporate action

• All filings are available with time stamp; no waiting 45 days for latest information

Risk Management and Alpha Generation Use Cases

• Sentiment Score: Crowded Long to Crowded Short

  • Alpha Generation: What does a PM or Analyst know that the market doesn’t know? Should the most concentrated long in the market be our largest long, and vice versa?

• Concentration Risk: Sentiment Score converted into GMV $ at risk

  • Risk Management/Portfolio Construction: Is the portfolio exposed to the herd (positioned the way the market is positioned), or contrarian (positioned against the market)? Is this the risk we want?

• Multi-Strat Implied Short

  • Risk Management/Portfolio Construction: Are long/short pair trades exposed to the herd (positioned the way the market is positioned), or contrarian (positioned against the market)? Is this the risk we want?

Enterprise Data

• Point-In-Time data is updated daily for disclosures globally 8am EST

• Accessible via: API/Feed/Excel Add-in/Export from GUI

Ownership in High Conviction Long Holdings Persists Over Time

By combining our unique and comprehensive view of short interest with publicly available holdings data, we have verified the structural long and short dynamics of the market. The highest conviction long holdings in the actively managed community persist significantly over time. The top 20% of concentrated holdings for active investor US positions have a persistence of 87%+ q/q consistently over the past decade. Because of the market dynamics, our view is that the investment process has evolved in a way that active managers hold their high conviction longs and trade the rest of their portfolios to maintain these highest conviction positions while dampening volatility through minimizing market, style and sector hedges—the indirect definition of a Sharpe ratio. This dynamic has held through all market regime changes back to 2010 (including inflation, monetary and fiscal policy changes, new approaches to energy consumption, COVID, etc.).

Research Conclusion Summary

• Over time, concentrated long and short positions make money until they don’t—the drawdowns are severe.

• Owning the most concentrated actively managed holdings in the market relative to the least concentrated active and passive holdings generates positive investment signals. However, they can significantly detract from performance in market dislocations and “quant-quakes”— which have become significantly more frequent. As a result, while the returns are positive over the long term, there is significant drawdown, blow-up and stop-out risk during the average holding period.

• Black Map shows passive and active flows that produce alpha and risk management signals that do not currently exist in the market.

• Depending on investment style and time horizon, Black Map can be used as a combination of alpha generation, portfolio construction and risk management analytics for both long (overweight) and short (underweight) positions.

Data Finding #1

Concentrated long and short positions outperform…until they don’t. Then the drawdowns are massive.

While concentrated active longs exhibit positive returns over the long run, they typically have significantly larger drawdowns in periods of market dislocation.

• Top decile active HF holdings (where Decile1 is the least concentrated names and Decile10 is the most concentrated names).

  • The most concentrated stocks perform better in terms of Sharpe and returns, but also exhibit much larger drawdowns.

  • This chart also shows the risk management and portfolio construction challenges associated with being overweight these concentrated securities for both short and long positions.

We have shown this as a chart of max drawdowns and an underwater plot:

Max Drawdown by Year: Least Concentrated vs. Most Concentrated Bucket

Drawdown/Underwater Plot: Least Concentrated (Blue) vs. Most Concentrated (Red)—Long Side Only

Data Finding #2

S3 Active vs Passive classifications help you classify securities and create new risk management factors that don’t currently exist in the market.

• Active: The first derivative of the changes in holdings (long the largest changes in active ownership and short the largest declines in active ownership) can derive value for stocks held by active investors.

• Passive: The first derivative of the changes in holdings (long the largest changes and short the largest declines) is largely noise given the extremely long duration and non-fundamental approach to portfolio construction.

We have shown this as basic long/short signals using top and bottom deciles for Active and Passive holdings. As shown in the matrix below, incorporating a factor that focuses on changes in actively held securities creates a clear signal. Changes in passive positioning have shown to be more noise given that changes in passive strategies do not align to fundamentals.