Long-Short Hedge Funds Are Necessary, Not Evil
Hedge funds that seek to profit from declining stock values serve a vital function.
A German lesson in the benefits of short sellers.
Photographer: Arne Dedert/picture alliance via Getty Images
Even a global pandemic has failed to curb investor enthusiasm for stocks, with the MSCI World Index of global equities about unchanged for the year after rallying hard from its March lows. As a result, short sellers who seek to profit from declines are becoming an endangered species. But their extinction would be a bad thing for financial markets.
In a short sale, a fund borrows stock from a broker or bank and sells it at the prevailing market price, betting that a decline will allow it to return the shares to the lender after repurchasing them at the new, lower value so they can pocket the difference. The rising global stock market tide, however, has been lifting all equity boats for several years, while the 2020 flood of central bank money designed to ameliorate the economic impact of the novel coronavirus is keeping zombie companies alive for longer.