How to find out what hedge funds are shorting and whether or not you should follow them

We’ve covered how to short major stocks like Facebook, Deutsche Bank and even Cryptos like Bitcoin when they were booming. But, how do you find good shorting opportunities in the stock markets?

But if you want to see what other traders are doing, one option is to copy other experienced traders and sell short when they do. You can, of course, do this through the new breed of social trading brokers like eToro or Pelican.

Or, instead of following complete amateur investors you could keep an eye on what the hedge funds are shorting and copy them instead.

Where to find out what hedge funds are shorting

It’s actually pretty easy. As with having to notify the exchange when you own more than a certain amount of a listed company. Firms have to disclose when their short positions exceed o.5% of a company.

You can find this information reported in the financial press, but also here:

Which brokers can you short stocks through?

If you want to short stocks you can use a CFD broker or spread betting brokers. Use our trading account comparison tables to see which suits your trading style best. Or read our reviews on any of the below that offer equity stock shorting:

Should you copy what hedge funds are shorting?

Now you know how to find out what hedge funds are shorting. But. Before you start playing amateur sleuth and screeching “core blimey, there’s more shorts than a Wham concert in this stock” it’s important to cover the risks of following hedge fund’s short positions…

Hedge funds don’t get it right all the time

There was a great article in the FT years ago about how hedge fund managers at GLG (one of the biggest UK hedgies and owed by Man where I used to work) about how they only get stock picking right about half the time. And that that, was in fact, ok.

The reason being of course that (as you should know by now) it’s not what you buy or sell. Trading, is really about how you manage risk and your positions after a trade has been put on.

GLG’s approach is as basic as buy low, sell high in that they run profits and cut losses. So, if they only pick winning trades half the time, they still make money by making having a greater win:loss ratio on the positions.

If you want to know more about win-loss ratios read The Art of Execution by Lee Freeman-Shor. It’s one of the best books on post-execution trade strategy.

Hedge funds operate on a long/short basis

Most alternative asset managers, aka hedge funds, will have two funds. One will generally be a long-term income or growth fund that invests in assets they believe will outperform the market or are income generating through high dividends or bond yields.

Hedgies may also have a long/short portfolio which consists of stocks or assets that are market neutral. The idea here is that it doesn’t matter if the overall market goes up or down as the fund will have an equal amount of long and short positions (albeit with a slight weighting if they have an overall market bias).

Which means that if a hedge fund has a large disclosed short positions they may not actually think the stock is going to go down. It may be part of a sector or pairs trade. For example, if a hedgie doesn’t know (or care) whether the banking sector in the UK will go up or down. But does think that Barclays will under-perform Lloyds, they will sell Barclays and buy Lloyds.  In this case, they have limited their exposure to large moves in either the underlying index or the banking sector.

Hedge funds are generally always invested

When an investor gives a hedge fund their money they are doing so for the fund manager to have it actively traded in the market.  Even though hedge funds tend to be higher risk than other types of fund they still have to have some sort or risk controls and portfolio exposure caps.

They do not (or should not) have the money sat around in cash then put all their eggs in one basket and Rio trade on a whim.

So when hedge funds disclose a large short position it will probably be part of an overall portfolio of positions hedged with options, index futures or some other OTC product you’ve never heard of and wouldn’t be able to trade even if you wanted to.

What are the risks of shorting stocks

Well as with all derivatives trading you can lose a massive amount of money very quickly. Here are the risks you have to consider:

  • In theory, a stock can go up forever so your potential loss is unlimited
  • You’ll pay financing charges on the position
  • You may be forced to buy back your position
  • A company may be suspended and your margin will go to 100%
  • The stock could become very volatile and you broker may ask for over 100% margin (as with crypto trading)

So why bother looking at what the hedge funds are shorting?

Well, what makes a market is opinions. You can either jump on the bandwagon and follow them or wait patiently for the bear squees when they buy their large position back.

What the major players are buying or selling, as with technical analysis, economic indicators, news flow, fundamental research all provide stimulus for trading.

If you want to see what’s going down flick through the charts on Investors Intelligence. You can rank stocks by Stockcube’s propriety trend score as well as P&F breakout signals. Or of course you can look at the trading signals section to see what stocks are potentially worth looking to short.

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