Shorting in an ISA fund - explanation please

Primrose

I've been looking around for a home of this year's ISA equity allowance and came across funds which "short", which I don't properly understand. I came across this explanation on the Hargreaves Lansdown website:

Shorting – an explanation
Traditionally investors buy assets they believe will rise in value. Shorting is different.

The principle is that the fund manager actually sells shares they don’t own. This in effect means he owes the buyer the shares. The buyer agrees they will not take delivery of the shares for, say, six months and the fund manager hopes that by then the share price will have fallen. After six months the fund manager purchases the shares in the market and passes them on to his buyer. The difference between the two prices is the profit or loss. For example:

1. Fund manager sells short 10,000 shares at £2 each = £20,000
2. Purchase these shares six months later at 80p each = £8,000
3. Profit = £12,000

In this example had the share price risen by the same amount, it would have cost the manager more to purchase the shares than they made from selling them and they would have made a £12,000 loss. There are many ways of effecting this investment strategy and managers may short by entering into contracts with a broker and not actually take delivery of the shares.

My question is: If the fund makes a £12,000 proft, who actually makes the loss and how do I know that this loss isn't being born by another fund in which I might have invested?"

Paul_Herring

Shorting is where you 'borrow' shares from someone, sell them, hope they go down, then buy them back at the lower price, and return them to their original owner. 'Naked shorting' is where you don't go to the bother of borrowing the shares to begin with, (which is why it's not generally allowed.)

My question is: If the fund makes a £12,000 proft, who actually makes the loss

The person you borrowed from/return the shares to, though it's technically a paper loss unless they sell them at that price.

and how do I know that this loss isn't being born by another fund in which I might have invested?"

Depends on if your other fund allows it's shares to be borrowed.

turbobob

Primrose wrote: »

My question is: If the fund makes a £12,000 proft, who actually makes the loss and how do I know that this loss isn't being born by another fund in which I might have invested?"

Since short sellers benefit from a fall in a share price, anyone who is long (owns) the share that went down in value would take the loss. On a practical level it might be difficult to find out the second part of your question because AFAIK funds don't have to declare short positions (except where required under regulations, like on some financial companies).