More education needed for short selling

With Short Selling becoming an increasingly favoured market practice, many investors are coming to believe that a short selling constraint in portfolio management, prevents them from fully exploiting their ability to forecast stock returns according to Scottish Widows Investment Partnership (SWIP).

However, many IFAs feel as though they need more education on the Short Selling concept and its impact on the investment market to enable them to offer comprehensive advice to retail investors. The need for continued education as Short Selling develops in the UK will be important to ensure that investors are aware of the pros and cons of investment and are able to make a considered investment decision.

Short-selling introduces a number of new risks, including 'short-squeezes', 'crowded exits' and theoretically unlimited losses. IFAs naturally wish to have a strong understanding of how these risks are managed in a portfolio.

Funds investing with Short Selling techniques enable the fund manager to act on a view that a given security is over-priced or likely to under-perform. SWIP manages a suite of three absolute return funds, launched in 2006, which can use derivatives to express a short view of a stock, bond and in the case of the macro fund, a short view of a given asset class: the SWIP Absolute Return Bond fund, SWIP Absolute Return Macro fund and the SWIP Absolute Return UK Equity fund.

James Clunie, Investment director, UK Equities at SWIP commented: “It is encouraging to see consistently increasing interest and enthusiasm for Short Selling among IFAs but we are also aware of the importance of education in the success of Short Selling investment in the UK. Investors need to understand what Short Selling incorporates, what the benefits are and what they can expect in terms of performance. The beauty of Short Selling is that it enables a fund manager to fully exploit their ability to forecast security returns, thus more informationally efficient’ portfolios can be created.”