UQ Business School student finds short selling important in better portfolio management

UQ Business School student Anthony Hatherley has found that better understanding the relationship between assets improves investors' ability to construct effectively diversified portfolios. Fresh from the award of his PhD last week, Dr Hatherley said diversification was a strategy designed to minimise risk and therefore losses during market downturns. "In theory, selecting assets that perform differently under particular market conditions means that the losses incurred by some assets are offset by gains in other assets in the portfolio," he said. "During a down market, this should mean that the portfolio will be less vulnerable to downside risk." "My research showed that the traditional way of diversifying during down markets is not as effective as it could be." Dr Hatherley said his research showed it was possible to improve on traditional portfolio construction methodology, often with lower transaction costs and lower volatility. "Interestingly, I also found the ability to short sell is important in protecting the portfolio from some of the downside risk," he said. "This raises a question about whether the short selling bans put in place at the beginning of the current economic crisis were justified." "In the long run, an inability to short sell might actually exacerbate down markets due to an inability to intelligently protect portfolios from the additional downside risk." Dr Hatherley said he also found that state-dependent correlations form a major component of asset returns. "This challenges the traditional view of asset pricing which ignores the differences in dependence between stocks and the state of the market," he said. Dr Hatherley worked with industry partner Tactical Global Management (TGM) on the research. "TGM is a specialist global equities management company so they were able to provide timely advice on a number of the studies I undertook as well as helping me develop the practical applications," he said. With two publications to his name already and more to come, Dr Hatherley is currently working as a Post-Doctoral Fellow at UQ Business School.