HBOS Short-selling

concorde

This is an interesting article from Robert Peston (BBC) in June of this year regarding the subject of short selling:

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/06/shortselling_banks.html

.. and the important quote is:

"Short-sellers have to borrow shares in order to sell them - and they borrow them from pension funds and insurers."

I wonder which institutions have been lending HBOS shares to these hedge funds who have been short selling over recent months?! Wouldn't it be nice if they themselves were the next target?!

It does seem strange that the pension fund managers loan shares to these hedge funds knowing that short selling is the intention (or maybe these pension fund managers have their heads in the clouds and don't have a clue what they are doing!).

tradetime

"Short-sellers have to borrow shares in order to sell them - and they borrow them from pension funds and insurers."

I don't know about FSA regs, but up until recently, it was not necessary for hedge funds to borrow the stock they were selling short, the process was known as "naked shorting" This practice is currently under review by the SEC and is likely to be outlawed soon.

It does seem strange that the pension fund managers loan shares to these hedge funds knowing that short selling is the intention (or maybe these pension fund managers have their heads in the clouds and don't have a clue what they are doing!).

That would suggest there is something inherently wrong with shorting. The practice of shorting is a normal market practice, why shouldn't they.

concorde

tradetime wrote: »

That would suggest there is something inherently wrong with shorting. The practice of shorting is a normal market practice, why shouldn't they.

but I assume the objective of the pension fund is to maximise the value of their stockholding? Therefore, unless the borrowing fees charged to the hedge funds exceed the predicted reduction in stock value, where is the benefit to the pension fund valuation?

tradetime

The objective of the pension fund is to find sound well managed companies with good growth prospects in the long term, upon which they can place a bet, if they have done this correctly then they have little to fear from short selling, since short selling is in essence a bet that the holder of a long position is wrong.

Opposition to short selling also confuses correlation with causation. Selling short only lowers the price sooner than would otherwise occur. It cannot force the price down for long if the fundamental circumstances do not support it. Short sellers simply recognize negative information sooner. Their activity can begin the process of reducing market prices, but it is the negative information that causes stock prices to fall. And if short sellers are wrong, they provide extra profit opportunities to those who expand their holdings at the temporarily low prices that result. Currently the financial sector is under extreme pressure, some financial institutions will fail, others will not, but all are at historically low prices. The pension fund managers who pick up the correct financial stocks at these low prices will benefit.