Trout

iTrader: (1)

Now this is where the real money is. Makes bankers look like paupers!

Hedge Fund Managers

DCI Gene Hunt

Nice...

zip106

Good for them!

JTaylor

zip106

What I meant was - why shouldn't they if they can get away with with it?

I know- morals, people starving around the world, blah blah blah.

ETA - I actually believe shorting should be banned completely, however.

alloy

Leslie

Can't blame them if the opportunity is there and what they are doing is legal.

Les

scud8

iTrader: (1)

The other big difference (compared to banks) is that hedge funds don't have an implicit government guarantee, so if they go belly up, only their investors lose their shirts.

My big concern with hedge funds is that they often tout themselves as low risk (which the linked article repeats) but without making it clear that the trading mechanisms and algorithms have a dark side. The flip side of going for an absolute return (so you gain whichever way the market moves) is that this only works if the market movement is limited, and bigger movements can magnify losses alarmingly - as LTCM found in 1998.

I'd be interested to know if the hedge fund world has moved on and solved this problem, but I suspect it is just a manifestation of mathematical expectation - ie. if you make investment decisions at random you would expect your losses to balance your gains. The LTCM way was to have a large probability of a small gain balanced by a small probability of a large loss. Maybe they are just getting better at calling the market - but if they are following the LTCM method they only have to get it badly wrong once to wipe themselves out.

Clarebabes

How does someone "borrow" shares? Can someone lend me some please?

zip106

What I actually meant was that I have no problem making money betting on stock prices going down, just that it shouldn't be done with 'borrowed' shares.

Is that what created a massive global problem a few years back - and why it was banned for a period of time?

J4CKO

iTrader: (1)

Can a car dealer sell borrowed cars ?

zip106

You'd have to sell the borrowed car and then immediately buy it back at a profit.

Jimpreza

My wife manages her own hedge, but thanks for the heads up.

alloy

They are simply equity swaps which is common place business. How else can you sell something you dont have without borrowing it first? When you borrow stock you pay finance on the sums of capital you borrow to trade in the markets, this enables investment banks and institutions to maintain a level of exposure and earn a level of interest on what they borrow out to customers who sell short. Additionally as we all know, everytime someone buys stock there has to be someone selling it to them so selling short creates liquidity for those who are buyers. As i stated in another thread, two views make a market, it's who is best informed that is the victor!

zip106

So what was it that was banned by the gov. for 3 months a few years back?

alloy

They banned short selling of the financial stocks, however as history has shown us this move did not create the support for the sectors share prices as it was thought to do so. This is because with out the short sellers out there there become even fewer buyers of the stocks, as to lock in profit you have to buy it back! Have a look at your charts and you can see that the brunt of the damage to these intsitutions share prices ensued after the ban had taken place....

zip106

Thanks for the info.

But could it not have been that the damage was manipulated by those hit by the ban, so as to prove a point?

Just to go back to your reply above - 'How else can you sell something you dont have without borrowing it first?' - by actually buying it first, or can it not work like that?

Trout

iTrader: (1)

The main reason for banning the shorting of financial stocks is that the sector is deeply intertwined. As the banks and insurers all have big holdings of each others shares.

As the market crumbled there were calls for capital from many quarters - dramatically lower financial sector stocks (a huge pool of investment) created massively added pressure for capital raising.

alloy

Most investors buy something expecting it to go up in value and then they sell. Shorting is the reverse, you borrow stock to sell on the expectation you can buy it back cheaper, earn the difference and then repay the stock back.

http://news.sky.com/skynews/Home/Bus...00809315102892

zip106

What happens if that stock falls before you repay it back?

As an aside, Alloy - you're not an IFA are you?

I neep some info regards a pension I'm paying into...

GlesgaKiss

That's the idea if you're shorting. If it rises you'll be in the red when you have to buy it back.

zip106

Ah right.
So whoever you borrowed the stock from wouldn't know?

GlesgaKiss

Not sure to be honest - I've never shorted actual stock (I use CFDs), I just know how it works. Presumably they wouldn't know, since you borrow it from the brokers. It must be in their terms & conditions, although obviously a lot of people don't bother to read them when they open an account.

Alloy could probably clear this up.

alloy

Basically for exapmle, if you wanted to borrow stock you come to me and i agree to "lend" you 100,000 shares at 100. Regardless of what the price does you have to pay me back at 100 and for having my stock on loan i will charge you a level of interest overnight. When you loan the stock off me what you actually take is the corresponding P&L on those shares. Short interest is the number of shares out on loan to people who have sold short of the company, this data is available but is costly and is always 24hours delayed. The naturally becomes a point when there simply isnt enough stock to lend to allow you to sell short.

No, for my sins i am a hedge fund manager

Butkus

If anyone's interested in what it's like to be a hedge fund trader, here's a film made back in 1987 about Paul Tudor Jones. The documentary was made in late '86/early '87 and you hear him 'predicting' a crash in late '87 or early '88 (which obviously came true). It's perhaps a bit dated now but this film was pretty hard to come by a few years ago, and even now I think this Chinese Youtube equivalent is the only place hosting the film on the internet.

Trader - Paul Tudor Jones

It takes ages to download but it's worth it - look out around 15 or 16 minutes into it where he puts on a $60m currency trade on Sunday night at home with a beer in hand!

Trout

iTrader: (1)

I have shorted shares. Get it right and it is great - get it wrong and you can get very screwed.

Go long, your potential loss is the price of the share - say £100.

Go short, your potential loss is infinite - for example short at £100 and the share rises to £1000, you immediately lose £900.

And it happened recently - lots of people had a short position on Porsche and the price spiked MASSIVELY. A leading German individual was bailed out for billions of Euros he lost on the one trade.

On average shares fall four times faster then they rise - so a confident shorting strategy you can make money four times faster.

Hedge funds use it, literally, to hedge their positions.

Trout

iTrader: (1)

And what can make things much worse is that lots of trades are done on the margin - so as well as borrowing the shares to short, you only place a fraction of the capital into the trade and the rest is loaned to you by the broker.

But as shorting can very quickly go wrong the margin calls can be huge.

Leverage at it's worse.

Trout

iTrader: (1)

The you make money.

You borrow shares at £100.

The share price falls to £50.

You then buy to cover - i.e. you buy shares at £50 and give them back to your broker who is now covered off and you have made £50 per share!

scud8

iTrader: (1)

In the US it used to be against SEC rules to short sell on a down-tick - ie. if the last movement in the stock price had been down (it was slightly more complicated than that, but that's the basic idea). The rule was abolished in July 2007 - how's that for timing!

The rationale behind the rule was to stop someone who had built up a large short position in a stock manipulating prices by repeatedly selling smaller blocks of stock at lower prices. The theory is that in this situation both buyers and sellers have an aligned interest in minimizing the price of the trade, disrupting the proper "price discovery" function of the market (not to mention disadvantaging other holders of the stock who are not party to the trade - ironically including the owners of the stock lent to the short sellers).

The SEC continues to discuss reintroducing the rule (or a modified version) but so far has not acted. Senior SEC figures and Ben Bernanke favour reinstatement but presumably some heavy behind the scenes lobbying is getting in the way.

I don't know whether UK stock markets have (or had) such a rule.

Trout

iTrader: (1)

I used to short in eTrade pro - you placed the order and it sat until there was an uptick. Then the trade would go through.

Didn't realise it was that long ago the rule was abolished.