Short selling has accumulated a lot of bad press during the financial crisis of 2008. In this posting, we will look at the strategy of short hedge funds. The strategy is simple. The fund manager shorts stocks of companies that they believe will go down in value. Any unused capital is usually invested in a safe security such as Treasuries. The value of the short positions is greater than the long positions unlike the long/short strategy. They are the opposite. They are net long.
According to Filippo Stefanini (Investment Strategies of Hedge Funds, 2006), a company that is a candidate for shorting would have management that lies to investors, insider trading, destruction of value, deteriorating fundamentals or changes in the equity structure.
Jim Chanos of Kynikos Associates Ltd is a prominent short seller. He is one of the managers who exposed Enron Corporation.
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