The cost for shorting assets

There are several asset ratings: buy, outperform, hold, underperform, sell. Some institutions have even more detailed categories, such as strong buy. Let's focus on the five most common ratings. We can find that there is only one rating that signals a possible choice of shorting the rated asset, this rating is sell. None of other ratings mean that we are profitable from shorting the rated asset. Underperform means the returns are not as good as many of other assets in the market and performing below the market average, it does not mean the rated asset delivers a negative return; therefore, when shorting a underperforming asset, instead of beating the market, you actually further widen the gap between your asset return and the market return. If we think the market has a uniform distribution of these categories of assets, then there is only 20% chance for us to short an asset. Finding a 20% chance is harder and costly than finding a 60% chance (buy, outperform and hold).

Then shorting an asset has a cap on the potential gains that the maximum you can get is the price that you short the asset at. However, longing an asset does not have a cap on the potential gains that there are some assets that deliver over 100% annual returns. Therefore, long strategy seems more attractive than short strategy. In addition, shorting an asset involves use of leverage. Use of leverage reduces investors' ability to bear the market volatility; therefore, it is possible that when investors are waiting for the market to fall, the market volatility forces investors to cut their short positions. Furthermore, the market tends to grow over time, this adds an upward environmental pressure on all assets, this means the shot strategy is against the market performance in long run, so short strategy is never a long term strategy. More importantly, timing is impossible to predict. The biggest challenge for short strategy is timing, short too early and short too late will significantly reduce the returns.

To conclude, since short strategy is always short term strategy and more risky and the opportunities are limited, it is sensible for us to seek for long opportunities that when short opportunities and long opportunities both exist, we should choose long opportunities over short opportunities when the expected returns are not significantly different, even when they are significantly different, we have to weigh the potential risk when making our decisions.