Hedge Funds Finding New Ways to Short

As reported at a Financial Times Alphaville blog post, hedge funds are looking for new ways to short securities, including everything from shorting index funds and then buying back every security in the index except one, to restructuring swaps to have the same exposure as a short position.

Both techniques will no doubt have an affect on market volatility as more stocks become actively traded. Ironically, derivatives such as swaps, which had their own role in the current financial crisis, are now being used to help get around restrictions imposed as a result of the very same crisis.

Where there is a will, there is a way. Innovation and financial engineering never sleep.

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Comments

[Brian Pursley:]

I have a better idea. Take your capital, leave the country, and never come back. The next totalitarian step after banning short selling is obviously to freeze our bank accounts and prevent us from leaving the country in search of financial freedom.

2008 Sep 23 03:48 PM

[alligator b...:]

why not just buy a put and sell a call? synthetically, it's the same thing as shorting a stock.

2008 Sep 24 11:04 AM

[Nom De Plum:]

Hey alligator, Your synthetic short has a finite life whereas shorting a stock doesn't. If you think you're going to get the trade right in 3 or 6 months you're just gambling....investors think in years.

2008 Sep 24 01:01 PM

[soonerxii:]

doesn't someone else have to short the stock to sell you a put?

2008 Sep 24 02:26 PM

[User 35577:]

If you do option 1, which is to short an index fund (let's just say S&P 500) and buy back the other 499 stocks, wouldn't your transaction fees make this cost prohibitive? How would this strategy work with the fees generated?

2008 Sep 24 05:26 PM

[User 223064:]

Can you expound more on those techniques that hedge funds are using? This is a good topic but needs a little more meat and explanations.

2008 Sep 24 11:24 PM

[Daniel Moser:]

The synthetic short idea works if you have the timing down. The interesting thing about it is that puts should be incredibly overpriced right now because the market makers (short put positions) cannot be hedged currently. So, here is an idea take a couple million dollars and go buy a ton of puts towards the end of the short selling ban, watch what happens when all the market makers rush to hedge their delta/gamma positions. The government could potentially put a lot of market makers out of business because they won't allow them the ability to properly hedge their positions.

Disclaimer: I do not support market manipulation. However I just happen to see a hole in the system in which big players may have the ability to crush certain market participants with regard to options trading during a short seller ban.

2008 Sep 26 12:59 PM