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Responsible Investment, Hedge

Funds, and Short Selling

Short selling is a defining aspect of hedge fund manage- In order to understand why short selling and responsible
ment. Short selling is what gave the first ‘hedged fund’ investment are compatible we must look at the objec-
its name, and it continues to be used across the industry tives behind the use of both techniques. We should also
to hedge risk and generate profit from overvalued assets. be clear on what short selling and responsible invest-
However, despite the benefits it provides both to inves- ment are not.
tors and to capital markets, short selling (or ‘shorting’)
remains subject to criticism in some quarters. Short selling

This has led some to question whether short selling is Simply put, short selling is the act of borrowing a secu-
compatible with responsible investment. Responsible rity, selling it to a third party, waiting for the price of that
investment—an umbrella term for the integration security to correct, then repurchasing and returning it—
of non-financial factors into investment decisions— keeping the difference as profit. Short selling is, as such,
is still nascent in the hedge fund industry, and like a way of generating profits from the price of an asset
short selling is often the subject of misunderstand- correcting downwards. It is most commonly used as a
ing. In fact, short selling is entirely compatible with risk mitigation tool; some managers use it to profit from
responsible investment. identifying overvalued assets.

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