Quindell - Marginal Short Positon Risk.

I'm sorry that I haven't posted anything for a while, I've been working on a quantitative finance program with an old friend that has occupied a lot of my time recently. 

Nevertheless, when I saw this great article on the QPPSAG webpage I couldn't help but get out my laptop and begin to expand upon it under the premiss of looking at short positions:

http://qppsag.wordpress.com/2014/09/20/uks-top-10-largest-law-firms-by-turnover/

Incidentally I am long Quindell and am a strong supporter of the company.

In a couple of respects this post is most closely related to these two posts I wrote a while back, so please give them a glance if you're interested:

http://themaskedstocktrader.blogspot.co.uk/2014/09/comparing-quindell-slater-and-gordon.html

http://themaskedstocktrader.blogspot.co.uk/2014/08/quindell-detailed-analysis-of-h12014.html

This article is posted from the position of a short private investor (so we're going to ignore the strong arguments regarding manipulation here). 

Company	Revenue/£m
Quindell	800-900
DLA Piper	1,570
Clifford Chance	1,360
Linklaters	1,260
Allen & Overy	1,230
Freshfields	1,230
Norton Rose	1,150
Hogan Lovells	1,100
Dentons	807.3
Herbert Smith	800

Using the revenue figures provided by the QPP SAG as an example, let us assume that one day Quindell will have a revenue to match the average here (£1,170m - taking Quindell's full 2014 figure to be 850m).

Now, further to this, we have to assume that all companies reflect a certain level of value disparity (hence why people invest because they perceive the current value to be more than the share price indicates).

What we end up extrapolating from that is as a general point is that if I were short Quindell, there would logically be certain levels where my short position would begin to come into heavy fundamental resistance (not chart and price resistance - although the two are often the same), because of continuing rising results. 

These continuing rising results in theory drag up the share's true perceived price (not necessarily its actual price) in relation to the results issued (hence why many people buy companies on PE ratios). 


What this ultimately means is that as Quindell continues to grow my hypothetical short position continues to gather more marginal risk for every marginal unit of unit of return, which in turn means that short positions in rapidly growing companies become exponentially more risky as the share price of an asset falls. 

Now, short positions will do this anyway, because logically the higher a share price is, the further it has to fall and vice versa, but the important factor to realise is that in quickly growing companies this relationship becomes much more exponential in nature and therefore rebounds from certain fundamental and technical strong support lines become much more pronounced.

In short, your marginal, or extra, risk per unit returned grows if you're short as new and improved company data is released dragging up the relative actual value of the share price in relation to these new figures.


What this means, is that for large short position holders and to a lesser extent smaller short position holders, it's much harder to close a short quickly by simply releasing another defamatory rumour, but added to this you're also in danger of being struck down by the positive results and news generation of the company in question.


Now, in my opinion the current movements in the share price are illustrative of at least a partial short closure. This could merely mean that they have an intention to do a large rinse and repeat, but because of this significantly increased marginal risk per unit return I'm doubtful of this.

For anyone who's having issues with any numbers or terms, have a look here where a good few will have been explained:

http://themaskedstocktrader.blogspot.co.uk/2014/07/understanding-ratios-definitions.html

All the best,

The Masked AIM Trader