abc asked in Business & FinanceInvesting · 1 decade ago

In SIMPLE terms can someone explain, hedge funds, Selling short(shorting )?

and why anyone would let you"borrow a security"to sell I know why the hedger does it cause he is expecting that it will decrease in value so that they can buy it back at a lower price and keep the difference.....but what is in it for the "lender" ..doesn't the fact that this guy wants to sell short tell you the price is going down ..why not sell it yourself....instead of letting him keep it until the price does go down and then give it back to you ..i know 10 stocks out , 10 back in...but the lenders porfolio is now worth less..what am i msissing here

6 Answers

  • 1 decade ago
    Favorite Answer

    First, in regards to short selling:

    The reason why someone would let you borrow their shares is because they are required to if they own the stock on margin. If you look at any margin account agreement from any stock brokerage firm, one of the provisions is that the brokerage firm has the right to lend your margined shares out to short sellers.

    What's in it for the lender is that he can continue to receive dividends from the stock (if it pays any) and he can buy the stock on margin. Generally, the lender doesn't even know their shares are being loaned out to a short seller; it's all computerized.

    You can't sell the shares yourself, because no brokerage firm will allow you to sell shares that you don't have (and it's illegal), unless you are short selling.

    If the lenders stock does go down, the short seller makes money, and the lender along with all the other short sellers are losing money. If the stock goes up, the reverse is true.

    Hedge funds do not just do short selling. They can invest in loans, real estate, mortgages, commodities, and other investments. Like mutual funds, hedge funds pool investors' money and invest those funds in financial instruments in an effort to make a positive return. Many hedge funds seek to profit in all kinds of markets by pursuing leveraging and other speculative investment practices that may increase the risk of investment loss.

    Unlike mutual funds, however, hedge funds are not required to register with the SEC. This means that hedge funds are subject to very few regulatory controls. Because of this lack of regulatory oversight, hedge funds historically have generally been available solely to accredited investors and large institutions. Most hedge funds also have voluntarily restricted investment to wealthy investors through high investment minimums (e.g., $1 million).

    For more information on hedge funds, go to:

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  • 1 decade ago

    You're obviously confused, and that's OK. Why are you asking about short sales and hedging in the same post? Anyway, short selling provides liquidity. Market makers will sell you whatever you want--long or short--because they make money on the many small variations in price over the course of a trading day. You're not a MM, so you need to have some clue as to what you think the instrument you're trading is going to do.

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  • 1 decade ago

    What's in it for the lender? They think that the stock is going to go up...that's what the market is all about - different takes on the same situation.

    Taking the opposite (going long)...based on your premise, MM's would never sell stock because they could make more money by keeping it.

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  • 4 years ago

    You give your money to a "manager" who invests it for you. He will invest in certain things but he will always "hedge" his bet so he can never lose more than 5% of the investment. If it goes up in value, he wasted his money by "hedging". Most hedge fund managers invest in things that pay a very small profit. It is small in percentages. But if you put $Billions of dollars into a small percentage, you can make a lot of money.

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  • 1 decade ago

    I can refer you to a great website that explains much of what you are asking for try this site I think its a great resource.

    It also has a great stock simulation game where you can practice before you play!

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  • 1 decade ago

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