Thomson Reuters has introduced a model to generate alpha by assessing short interest data collected from US equity markets. The StarMine Short Interest model ranks stocks based on the observation that stocks with a high number of shares shorted will underperform while those with low short interest will outperform.
The Short Interest model accounts for the cost of shorting different stocks by examining the level of institutional ownership as a proxy for the number of shares available to be lent to short sellers, while adjusting for well-known arbitrage strategies such as M&A and dividend arbitrage that can affect levels of short interest.
The Thomson Reuters StarMine Short Interest model ranks stocks based on their predicted likelihood of large upward spikes in the near future based on medium and long-term price volatility combined with the level of short interest. The launch of the Short Interest model supports Thomson Reuters vision to connect and enable the global financial community by helping professional investment managers generate more profitable investment ideas and mitigate risks, giving them an edge over their peers.
Dr. George Bonne, director of quantitative research at Thomson Reuters said: “What we do is more difficult because it requires merging together multiple pieces of disparate information and data from short interest, deals, institutional holdings, and fundamentals but thats what is required to generate real alpha these days. The proof is in both the performance of live data and in backtests of historical data.
(JDC)