Hello,
As I was reading the chapter on hedge funds something looked strange. It has been mentioned several times that shorting assets is a way to gain leverage. However, in the example in the text, and in the notes, why would we have to give 10,000,000 to a prime broker so that he can sell short and then buy stock for us? If we were shorting stock, couldn't we just use those proceeds to purchase another stock? I just don't see why we need to fund this. We sell options all of the time in order to buy more options. This is a legitimate strategy (like a collar or bull spread). We would obviously have some margin requirements or need to post some collateral, but why would we have to lay out more than the amount of the total long position? If we just wanted to short a stock, we certainly would not have to "pay" for the entire amount of the stock. Again, we would need some collateral and margin but it seems like shorting is not doing anything for us except setting up a new position. It is not really helping to "fund" anything.
Any explanation of this would be great.
Thanks!
Shannon
As I was reading the chapter on hedge funds something looked strange. It has been mentioned several times that shorting assets is a way to gain leverage. However, in the example in the text, and in the notes, why would we have to give 10,000,000 to a prime broker so that he can sell short and then buy stock for us? If we were shorting stock, couldn't we just use those proceeds to purchase another stock? I just don't see why we need to fund this. We sell options all of the time in order to buy more options. This is a legitimate strategy (like a collar or bull spread). We would obviously have some margin requirements or need to post some collateral, but why would we have to lay out more than the amount of the total long position? If we just wanted to short a stock, we certainly would not have to "pay" for the entire amount of the stock. Again, we would need some collateral and margin but it seems like shorting is not doing anything for us except setting up a new position. It is not really helping to "fund" anything.
Any explanation of this would be great.
Thanks!
Shannon
