Short-Selling
Fri, 19/09/2008 - 15:17
its called gambling, taking a punt. the company that lends them the shares will also make a profit if they get it right and from what i udnerstand these guys are pretty fierce and as there is so much money involved they work hard to get it right. what i want to know is what will happen to hedge funds now? surely they will all go bust and that means more unemployment?
Fri, 19/09/2008 - 15:56
Quite right Max. Silver Saver I have tried to explain this in my latest blog - I know it sounds like a ridiculous way to make money, but it makes sense for both parties, particularly because the ones who 'lend' the shares are the ones who want to keep them, such as pension funds. It is called 'going long' - hoping they will rise in value. Sure the price of HBOS may dip but they take a futuristic view and think they will be worth more years down the line.
So when they lend the shares to a hedge fund, the hedge fund says: "Can I borrow your HBOS shares for a week? I will give them all back to you, and I'll give you some extra commission on top."
So they borrow the shares and sell them for £100,000. A week later they drop to £50,000. The hedge fund buys them all back and makes a £50,000 profit. They then give them back to the original owner with a little bit extra, say £5,000. Pension fund is happy, hedge fund is happy, it's a win-win situation (if it works of course!).
Hope that makes sense.
Sun, 21/09/2008 - 07:19
I'm sorry, but this is too sophisticated for me. If I lent some shares and got them back at half of their value I would consider that I had made a stupid arrangement. I realise that the shares will (hopefully) increase in value but the value sitting in the hedge fund's bank account is my money that I have lost and will never get back.
It's a little like digging a hole to put your ladder in when you want to paint the house. Yes, you can still buy a longer ladder to get the same height - but it would have been more sensible to have started at ground level.
However, perhaps your explanation tells my why some of my investment funds have lost value. The idiots running them have obviously lent the investments to the hedge funds and got them back at half price!
Tue, 23/09/2008 - 20:01
Well, the Mail on Sunday finally brought the full light of day onto my non-comprehension on this subject. It appears that the shares lent to the speculators are lent by various fund managers who make their living by looking after clients' investments. By 'looking after' they apparently mean lending them to dubious characters who are intent on devaluing them in order to make themselves a killing. The fund managers obviously don't give a toss about the fact that their clients' investments are being impoverished - and all for chicken feed. Apparently an HBOS subsidiary (Insight Asset Management) was responsible for lending some of their clients' HBOS shares in order to make themselves a small matter of about 0.5% annual interest. A fund that lent a million HBOS shares on Monday of last week and received them back on Friday would have earned about £2800. Their clients would have lost £595,000 in the transaction. I cannot see this as anything but fraud, perpetrated on the clients by people who are being paid to help the client to enhance their wealth. If anyone has a better description of the actions of these low-lives then I would be glad to hear it.
Thu, 02/10/2008 - 21:02
I wondered who lent shares and why. Thanks for the info. The spreading of false rumours which I read about makes sense - when shorting it pays some dealers to manipulate the share value of a company; if a sector is already weak it is easy to drive down the price still further. In fact, that is the only sure way of keep winning.
The pension fund lenders don't get much on a deal. Yes, I too see it as fraud as those lenders must know that share prices are being manipulated by the spreading of false rumours. Hardly looking after investors interests, is it?
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During the last few months I have seen the same explanation of short-selling about 50 times. However, this doesn't make sense to me.
According to the explanation, someone wishing to make a profit borrows some shares, sells them and then buys them back after the price has (hopefully) dropped and returns the borrowed shares, pocketing the price difference.
What I don't understand is why anyone would lend them the shares in the first place. Let's suppose that I have £100,000 of HBOS shares. Someone borrows them and sells them - bringing the price down. They then purchase the equivalent number of shares back (let's say for £50,000) and return them to me. Thanks very much, friend! I now have HBOS shares worth £50,000 whereas I used to have £100,000 worth.
Does this really happen? Or have I completely misunderstood?