Hedging, Arbitrage, Hedge Funds, and You
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It is estimated that 95 percent of short selling is a direct result of
institutional hedging and arbitrage. Interestingly, hedge funds contributed
only a small percentage to short selling. Shorting stock as
a regular strategy to make money, other than in the case of arbihightrage, is not normally practiced on Wall Street. Most of the time,
fund traders buy the stock to go long with the intention of holding it
overnight. When institutions enter a short position, they usually are
held overnight as well. All of this information is important to you if
you are planning to short on a regular basis.
Sometimes it is difficult to find stock to short. This is especially
true on the Nasdaq if you are trying to short stock that has small
trading volume and little liquidity. I would suggest that you not
trade this kind of stock no matter what the hype. Most brokerages
will have a short list of stocks that are in their inventory. If you are
going to short a stock and hold it overnight, I suggest you have liquidity.
Having stocks on this list usually means that the broker has
enough on hand in case you have to cover a short position. If you
are going to short, I suggest you short intraday and not hold a short
position overnight. If you short intraday, you are short stock for
only minutes or a few hours. By the end of the day you are out of the
trade. Liquidity is almost never a problem for electronic traders
who short stock during the day. Some electronic trading firms have
a short list of stocks that you can check if need be. As an electronic
trader you will find that you will be short almost as much as you are
long. This being the case, you must learn to become a highly skilled
short trader. Part of becoming a skilled short trader is understanding
institutions and their behavior. Sometimes this behavior can
lead to a short-covering rally.
It is estimated that 95 percent of short selling is a direct result of
institutional hedging and arbitrage. Interestingly, hedge funds contributed
only a small percentage to short selling. Shorting stock as
a regular strategy to make money, other than in the case of arbihightrage, is not normally practiced on Wall Street. Most of the time,
fund traders buy the stock to go long with the intention of holding it
overnight. When institutions enter a short position, they usually are
held overnight as well. All of this information is important to you if
you are planning to short on a regular basis.
Sometimes it is difficult to find stock to short. This is especially
true on the Nasdaq if you are trying to short stock that has small
trading volume and little liquidity. I would suggest that you not
trade this kind of stock no matter what the hype. Most brokerages
will have a short list of stocks that are in their inventory. If you are
going to short a stock and hold it overnight, I suggest you have liquidity.
Having stocks on this list usually means that the broker has
enough on hand in case you have to cover a short position. If you
are going to short, I suggest you short intraday and not hold a short
position overnight. If you short intraday, you are short stock for
only minutes or a few hours. By the end of the day you are out of the
trade. Liquidity is almost never a problem for electronic traders
who short stock during the day. Some electronic trading firms have
a short list of stocks that you can check if need be. As an electronic
trader you will find that you will be short almost as much as you are
long. This being the case, you must learn to become a highly skilled
short trader. Part of becoming a skilled short trader is understanding
institutions and their behavior. Sometimes this behavior can
lead to a short-covering rally.