Betting on a bear market

It’s been a miserable start to the year for most investors, says Alex Williams. But not for short-selling hedge fund managers.

It's been a miserable start to the year for most investors the worst on record for many stockmarkets. Indeed, the only people feeling jubilant about their portfolios right now are probably short sellers those who profit when markets fall. Short-selling is most aggressively used by hedge funds.

Put simply, a hedge fund might borrow shares in a company from the current owners (a pension fund, say) for an agreed fee. The hedge fund will sell the shares in the open market. It'll later buy them to return to the pension fund at an agreed date. The hedge fund profits if it can buy the shares back for less than it sold them for in the first place. But of course, if the price has gone up since it sold them, it makes a loss.

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