Allocation for Short Selling

Something which could become a game-changer for asset allocation worldwide, as investors pick up the pieces of the current financial catastrophe: We believe that many more asset allocators will initiate an allocation for shorting -- bets that a security class will drop. This is not common today, but a natural extension of the recent trend to add market-neutral hedge funds to one's asset allocation. It has occurred to us more than once as we held 0% in emerging market equities this year (because of our avidly bearish case, as discussed in this blog), that we should have had a negative allocation here all year long. (And it's not too late, as our last post argues.) The case for shorting would fit many asset allocators' small allotment for a "trading allocation," but we think negative bets could become a more enshrined piece of asset allocation, particularly as we may be staring into several more years of sideways markets.