Capital required for Short Positions
Hi Guys,
I have a very basic question on how much capital is tied when a fund is short a position, and I am hoping someone here can help. In theory the cost of shorting should be very minimal since you are only paying for "renting" the stock that you are shorting, so in effect if you have say $100 of short positions, you are only tying up about $2 of your capital. Does that make sense ? So when a fund say that they have $70m of long positions and $30m of short with gross exposure of $100m , that wouldn't mean that they have invested capital of $100m right ? The bulk of the capital is invested in long positions, so more like $70m in this case. Am I thinking this right ?
Guys,
C'mon not one response ??? This should be fairly straightforward for guys who work at a hedge fund. Anyone please.
I believe you are factoring in borrowing costs here but not the margin requirements to short a stock. Also, I generally see exposures expressed as a % and not a $ figure which I think is making the phrasing of the question a little difficult to interpret since you seem to jump back and forth between $ and % inadvertently. The links below detail how shorting a stock works and some of the regulations behind shorting a stock:
http://www.investopedia.com/university/shortselling/shortselling2.asp http://www.investopedia.com/terms/r/regulationt.asp
thanks. I will take a look at the links. But, back to my original point, the gross exposure for a long/short fund would be more than its AUM right ? Just working with %, if a fund is 70% long and 30% short, that does that tell us about how much of its AUM is tied in the long positions. Assume you ignore the margin and "renting" costs since they are probably a small portion of the short exposure, would it be fair to say that the 70% of long is tying up pretty much all of its AUM ?
gross exposure is measured in % of aum. long story short, how much you can short will depend on cap on gross exposure which is usually in the pb agreement and in the fund's ppm
So let's say I have $100m AUM and my gross exposure is 100% of AUM , 70% long + 30% short. Tell me how much AUM out of the $100m is assigned to the long positions.
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