The recent rally in shares has perplexed many fundamentals-based investors. Most of the biggest increases have been in shares with the worst 'fundamentals' – it's been nicknamed the 'Dash for Trash'. Many value-based investors, especially hedge funds, are now sharpening their knives, intent on shorting the next leg of the bear market, despite the controversy surrounding short selling and its alleged disastrous effects on its 'victims'.
Markets have been behaving rather peculiarly over the past few months. Relieved by the thought that financial armageddon would appear to have been averted (along with that word, Depression), many investors seem to have held their noses and waded deep into the trashier end of the markets, bidding up the share prices of the most financially suspect.
Bloomberg reports that companies with the most debt and the lowest return on assets have staged the biggest rally in prices over the past few months. Focusing on the benchmark S&P 500, Bloomberg notes that the 120 companies with debt-to-equity ratios of more than 50 per cent and a return on assets of less than zero (real stinkers based on any sensible fundamentals-based analysis) reported the biggest share price increases (an average of 82 per cent) for the period between 9 March and 17 April.
However, most hedge funds had bet the other way. Having screened the market for 'bad stocks', these 'negative momentum' short hedge funds delivered average returns of minus 27 per cent in April in the US and minus 20 per cent in March in Europe.
