Hedge fund millionaires backing Boris Johnson will make a killing from a no-deal Brexit, according to the former chancellor Philip Hammond. The claim is these “short sellers” are betting on big falls in share prices and the value of sterling in what critics say is a classic example of “disaster capitalism”. But how do they do it, who are they and are they all merchants of doom?
The conventional way to make money from shares is to buy at a low price then sell at a high price. It is called going long. Shorting is the opposite: buying high and selling low.
The approach of hedge funds is to target a share they believe is heading for a fall. But the only way to make a profit is by not really owning those shares in the first place, rather “borrowing” them. Typically, the hedge fund borrows them, at a small fee, from a pension fund that is holding them for the long term.
The investor (speculator is probably a better word) borrows, say, 10,000 BP shares and promises to return them at a fixed time – let’s say in a month. The speculator instantly sells the BP shares at the going market price – say 500p, giving them £50,000.
In a month’s time, when they have to return the shares to the pension fund, the shares have fallen to, say, 400p. So the speculator goes into the market, buys 10,000 shares for £40,000 and hands them back, making a profit of £10,000 along the way. But if the shares have risen to 600p, they will make a loss of £10,000.
The reality is rather more sophisticated than this – speculators rarely take actual delivery of shares, and use other methods such as CFDs (contracts for difference) and short ETFs (exchange traded funds) – but the principle is the same.
Many hedge funds made a fortune when Thomas Cook went under. But a lot of them are not very good at it. When working for other investors, they tend to charge 2% upfront plus 20% of any gain, but on average produce poor returns. According to Bloomberg, the hedge fund industry gave investors a 4.1% loss in 2018, although an Odey fund was top of the table with a 53% gain.
(A Guardian article)
Personally, I think that if Boris groped the thigh of a woman 20 years ago it means bugger-all to anyone, but maybe I never had any secret - or public - ambitions to be king of the world. I have groped so many women over the last 40 years that I believe I may have blown any chance of being Prime Minister for the foreseeable future, and my foreseeable future - realistically - extends for only about 10 or 12 years. Leave the groping to the young is what I say.
ReplyDeleteYour concept of taking a 'short' position is an interesting one. To 'buy high and sell low' is more the Gordon Brown method, and would lose you a lot of money. I think what you meant was to 'Sell high, then buy back low'; i.e. selling what you didn't own, then buying later at a lower price. A normal Stock Exchange practice.
ReplyDeleteI believe that is what the journalist meant when he wrote the article.
DeleteHe might have meant it, but he got it the wrong way round; no-one in their right minds would purposefully buy high and sell low.
DeleteCro makes sense here.
DeleteYou are forgetting (maybe) that the short seller does not actually buy the shares to begin with, they more or less borrow them with a promise to pay later. Their skill lies in being able to spot an imminent fall in share price and then being in a position to sell on when the time comes to actually pay the bill. Ask Rachel. She understands it far better than I do.
DeleteI think the profit lies in the shortfall, but check with R.
DeleteThe Guardian man describes it badly. What you do with short selling is you carry out a sale of some shares you don't have when the share price is high (the rest of the market have not spotted a downturn coming like clever clogs you). The buyer doesn't know that you haven't actually got the shares to sell because you are not required to deliver until the end of the accounting period. You then have a fortnight (the Stock Market accounting period) to play with while you watch the share price fall (you hope) and you then carry out the buy side of the trade and it closes off. No stock will change hands. Your profit is the difference between the two trades. The Stock Exchange accounting period allows this. You can do what you like during that period so long as you close off your trade before the period ends. You need to keep your eye on the ball and not get greedy.
DeleteThank you. I'm a bit clearer about it now too.
DeleteThis is what George Soros does. He shorted on the pound and black Wednesday was the result and we crashed out of the ERM in '92. He could bring down countries, and did. I used to short all the time, it takes an astute eye to spot potential falling situations. We were not allowed to short for clients eventually after one enormous mistake to our firm where trading in a company was suspended on the Exchange before the client got out, ie bought back. He then had to pay up to cover the short sale and didn't have the money to do it. We could short only for ourselves. Many private client stockbrokers now ban it altogether.
ReplyDeleteSpeculating on failure cannot be good for a country. Everything is short-term these days, unless it is Other People's Money being invested long-term.
DeleteI used to sell short quite often (and did very well). Now my broker won't take a short sale for love nor money!
ReplyDeleteGood.
DeleteTom - any chance that you could 'up' the size of the type on your posts - I am finding it extremely hard to read. Just a little increase would help.
ReplyDeleteWeaver: try holding down the control key and pressing + to make it bigger and - to make it smaller age and reset back to how it was.
DeleteYes, Weave. It is easier for you to expand the text on your computer.
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