Short-selling involves borrowing securities, selling them on the open market and buying them back at a future date – ideally at a lower price.As the chorus of experts predicting a global recession grows and the equities bull market continues into its second decade, some financial advisors and investors are placing a greater importance on preparing portfolios for a bear market.
“It’s important to know how and why one of these funds is going to diversify your portfolio and how and why the diversification benefits might fail.” “A fund manager is 100 per cent invested, sells short the bottom third of the assets and reinvests the proceeds from the sale into the top the of the portfolio. Essentially you have 130 per cent exposure long and 30 per cent short,” Mr. Baker says.
“It’s their full time job. It’s what they’re doing every day. They’re putting a lot of research into their methods,” he says. “You should be very well capitalized, understand the risk, understand the price where you’re going to take profit and – more importantly – what’s the price where you’re going to get out if it goes against you,” he says.
“If you go long a stock, it can only go to zero. If you short a stock, theoretically, the price can go up forever,” he says. “Sometimes you see a company get taken over by another company and it goes up by 40 per cent. That’s not the kind of loss a lot of people can withstand.”
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