A client has recently asked me if I could “explain what short selling is and how hedge funds use them. I have heard they are highly risky and I also know of concerns that exist about some of their ethical standards.”
Unlike the simple buying of shares where an investor buys them hoping that they will rise, short selling is a tactic used to make money when a share price goes down. If the price does fall the person who has shorted them gains and vice versa.
So is there a problem? Well, many hedge funds operate at an ethical value I am sure. Personally I don’t use anything unless it is fully transparent. If I can’t see why an investment will go up or down I don’t make the investment. If I make a decision that later turns out to be wrong, I want to be able to still say that I would still have made that decision at the time I invested. I don’t want to be kicking myself because I believed noise and because I made an investment without knowing the details back to front.
Unlike the investment in shares, shorting is much less regulated. An investor investing in a share wants it to go up and everyone investing in such shares will want it to go up. This is good for the economy and the strongest shares do well but shorting is a negative approach which has a negative outcome.