Hedge funds and short sales. An open debate

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IE Focus - Hedge FundsIE Focus | By Rafael Hurtado, Professor at IE Business School

The collapse of the stock market has highlighted the shortcomings of the hedge fund system of short sales and fuelled debate on the need to set limits and rules for this type of operation.In recent months, and in particular after the great crash of the stock markets as from September 2008, the hedge fund system of short sales has been a subject of analysis and debate by many players on financial markets. The consequences and system of short sales are a source of great controversy in the financial sector.

Short sales take place through the loan of securities. A short position (short sale) takes place through the sale of an asset that is not held by the investor, but borrowed through an intermediary and later bought to pay the loan. The profit is obtained if the initial sale is completed at a higher price than the purchase price. With a short sale, the investor obtains greater profit if the price of the asset falls.

On many occasions, hedge funds not only involve short sales, but also use a significant amount of leverage. For a short sale, an intermediary must lend a certain number of shares. Some companies say that they have uncovered signs of their shares being lent as part of a chain. This type of transaction involves further risk.

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New times, new concepts

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1812IE Focus | By Enrique Dans, Professor at IE Business School

The concept we have had of computers to date is set to disappear under a landslide of Internet realities that offer a new way of working online. Google´s announcement of its project to launch an operating system, Google Chrome OS, is not just another announcement in the hyperactive wasteland of technology news. The announcement is something more than that. It is a change of concept that affects the definition of a computer and what we do with it. Something that is going to change the way we work.

For many years now a computer has been the machine used to do the same things that were done without it, only more quickly and more efficiently. The word processor was a post-modern typewriter that produced results that were aesthetically better in less time by separating the composition process from the printing process. The spreadsheet was a “calculator on steroids”, which avoided the sequential repetition of chains of operations by placing them on coordinates. A bookkeeping or salary application was the fast way to tackle a monthly task that was both tedious and repetitive. For workers, a computer was a machine they used for doing the same thing, but more quickly. And to do that, they needed hardware, an operating system and the right applications. Last century´s computing system: buy a computer, which comes with a large, heavy operating system “that has everything” (including a computer and a game of solitaire!) and then buy the programmes you need to “do things”.

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