An Introduction to Short Selling


MFA’s also released a video series to answer common questions about the hedge fund industry, including:

  • What is a hedge fund?
  • Who invests in hedge funds?
  • Why do investors partner with hedge funds?
  • What role do hedge funds play in the global economy?
  • How do recent regulatory efforts such as the Dodd-Frank Act and European Union regulations shape the hedge fund industry?

Check back often for updates and new videos.

Chapter 1 – What are Hedge Funds and Who Invests in Them

This video explains the basic facts about hedge funds and who invests in them. Hedge fund investors must meet basic requirements defined by the Securities and Exchange Commission prior to investing. Investors generally fall into two categories, institutional investors like pension plans, endowments and large philanthropies or high net worth individuals. Nearly two-thirds of all industry investors are institutions, so many individuals who do not invest in hedge funds directly do so indirectly through their pension plans.

Chapter 2 – Organization of Hedge Funds

A hedge fund is an investment fund that pools capital from a limited number of investors and uses it to purchase a portfolio of assets. Most hedge funds are organized as limited partnerships. This video looks at how these partnerships are structured and the role each type partner plays in the fund’s organization.

Chapter 3 – Regulation of Hedge Funds

This video breaks down the layers of state and federal regulations with which the industry complies. In addition to laws specifically focused on hedge fund activities, all fund managers are subject to federal laws prohibiting insider trading, market manipulation and fraud. Finally, while the industry is highly-regulated, there is no government backstop and no hedge fund received a Troubled Asset Relief Program bailout during the financial crisis.

Chapter 4 – Why Investors Use Hedge Funds & Industry Growth

The first hedge fund was started in 1949 by Alfred Winslow Jones, a sociologist and writer for Fortune Magazine. The industry grew rapidly in the 1990s and now manages approximately $3 trillion globally. This video examines how institutional investors began using hedge funds as tools to help diversify their portfolios, and how that fueled the industry’s growth.

Chapter 5 – Hedge Fund Investment Techniques

This video discusses different investment tools and techniques that are more common in the alternative industry than with more traditional investment funds. Short selling and the use of leverage are just two techniques commonly used by hedge funds that are explored in the video.

Chapter 6 – Hedge Fund Strategy: Traditional Equity Long-Short

This video discusses a trading strategy known as equity long-short. This is one of the most traditional investment techniques common in the alternative investment industry. The video explains how a fund can purchase stocks the manager expects to increase in value and “short” those stocks that could decrease in value. This strategy can be market neutral if the long and short positions offset each other. Picking the correct stock allows the fund’s investors to profit regardless of whether the market goes up or down as a whole.

Chapter 7 – Hedge Fund Strategy: Event Driven

Many alternative investment funds use event driven strategies. This means the fund manager will trade stocks in a company based on the likelihood of a corporate event like a merger or acquisition happening. This video explains how fund managers study factors that may impact a major corporate event, and buy or sell stocks based on their research.