Tuesday, April 07, 2020

Pandemic? Alright for some (3)

Short selling is the practice where hedge funds and other financial speculators borrow shares in listed companies from pension funds and sell them in the expectation that they will fall in price. Some in industry and regulatory circles argue that short selling is economically and socially damaging at a time of a general market panic, forcing the share prices of perfectly viable companies down further for no good underlying reason.

Hedge funds are continuing to short sell UK-listed companies amid the coronavirus-driven stock market collapse, despite a suggestion from the new Bank of England governor that they should stop.

Over the first three months of 2020, the FTSE 100 plunged by 25 per cent, the share index’s worst quarterly performance since 1987, as many investors rushed to dump companies’ stock.

​The speed of the sell-off and the role of short-sellers in the market mayhem has concerned the Bank’s governor, Andrew Bailey, who told the BBC on 18 March: “Anybody who says, ‘I can make a load of money by shorting’ which might not be frankly in the interest of the economy, the interest of the people, just stop and think what you’re doing.”
A hedge fund industry source told The Independent that the personal financial incentive for managers to short companies was too great. “What are you more scared of? Losing your job or the Bank of England? If you offered any hedge fund manager right now an option to short a company in severe distress, of course they are going to take it. You’d be insane not to.”
Instead, some hedge funds have even increased the size of their bets against UK-listed firms including the Royal Mail and supermarket chain Morrisons.

Hedge fund manager, Crispin Odey, told The Mail On Sunday in an interview published on 21 March that his fund had made £115m from shorting UK stocks in March.
It is not only through short selling shares that hedge funds can make profits in falling markets.US hedge fund boss Bill Ackman revealed in a letter to shareholders last month that his Pershing Square Capital fund recently made $2.75bn from credit default swaps – derivative contracts that rise in value when firms’ traded debt falls in value because of rising market fears of bankruptcy.​

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