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Gamestop hedge fund8/2/2023 This beneficial impact is one reason why the index provider MSCI requires short selling be possible before it will consider a market for inclusion in its developed market benchmarks.Īn area of emerging interest is funds with a sustainability focus which short stocks. Stock pickers on steroids also help to bring market prices into balance, so contribute to overall market efficiency. It’s like the value style of investing but with extra bells on top. This can either be done on a stand-alone basis or by taking a long position in (buying) those companies that are expected to do well and a short position in those that are expected to struggle. “Shorting” these companies is a more direct way to position for their anticipated fall in value towards more reasonable levels than would be possible in a long-only portfolio. The stock picker on steroids is no different but they search for overvalued stocks or stocks which are facing structural headwinds that are not yet fully reflected in the price. If they don’t like a company they can hold less of it than the benchmark allocation (an underweight position) or not hold any at all. Traditional so-called long-only investors in the stock market try to identify undervalued stocks, in the expectation that their value will converge on some estimate of fair value. In general, those actions reflect their motivations, which can be broadly split into four categories: Stock picking on steroids To assess the ethics of short-selling, we therefore need to consider the actions of different short sellers rather than short selling as a principle. Ethical questions arise when investors take additional steps to influence companies’ financial health and value after they have bought or sold shares. Companies are not deprived of funds when investors sell shares nor do they become financially stronger when investors buy shares in public markets. Short selling does not directly undermine the health of a company any more than buying its shares improves its fundamentals. In our view, the pertinent question is less whether short selling is ethical and more how investors behave, whether in expectation of price rises or falls. There are no blanket answers to questions of the ethics of short selling. Its reputation is unfairly tarnished by the actions of a few cowboys. While it undeniably has its more unsavoury side, short selling can also help manage risk more effectively and contribute to market efficiency. However, a look past the headlines reveals a more complex reality. Short selling is often associated with lurid headlines predicting corporate failure, market abuse and policymakers’ concerns that the practice undermines financial markets. On the face of it, an investment strategy specifically designed to gain in value when companies fall in value might not seem particularly responsible. A so-called “short futures” position will deliver a return if a stock market falls and a loss if it rises. One implication is that positions tend to only be put in place for relatively short time horizons.Īnother way to profit from declines is through derivatives known as futures, although these are more commonly used at the overall stock market level than for individual stocks. The borrowing involved in this strategy introduces some additional risks (and costs) compared with traditional stock market investing. In practical terms, short selling involves borrowing a stock from an investor then immediately selling it, in the hope that its price will fall and it can be bought back later at a cheaper price.Ī profit is realised based on the price decline (or a loss if the price rises).Īt that stage it is returned to the original shareholder, who receives a fee for their troubles. So what is short selling, why does it attract such strong negative reactions, and is it a fair assessment? Short selling explained So much so that lots of members of the Reddit community which spearheaded the attack openly say they want to drive “short sellers” out of business. It has also shone a light on a practice that makes many people feel uneasy: “short selling”. The global media has recently been entranced by a battle between retail traders and hedge funds over the US computer game store, GameStop.
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