More on returns from short selling


Thanks for the illuminating conversation about short selling.  What you explained was that the primebroker, in this case, wasn’t requiring an explicit margin to be posted on short sales, because the primebroker was permitting a degree of leverage in these operations.  The entire equity of the fund was behind this decision of the primebroker to not post explicit margin requirements.

But that still doesn’t quite solve the problem of the return on a particular short sale.  How do I measure this intangible “degree of confidence” that my primebroker has in me?


One Response to “More on returns from short selling”

  1. joshi Says:

    quite right – you can’t compute an explicit return on a particular short if you are getting portfolio level margin. in that case, you have to figure out what the haircut/margin would be on the short sale were it undertaken by itself (gosh what a clumsy phrase).

    here’s a ridiculous example: suppose the fund has its entire position in one stock. it wants to sell that position, but for tax reasons prefers to short the same amount instead. so now the fund has no risk – and of course, ignoring trivial costs, there is no more change in the funds equity.

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