Talking to Sebastian Mallaby

By Felix Salmon
June 15, 2010

Sebastian Mallaby came in to Reuters today to plug his new book, and so naturally we talked about hedge funds. He’s more positive about them than I am, but even he reckons that they make sense as investments only for big institutional investors:

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
Comments
5 comments so far

No one likes having their crack taken away. And what is it with the references to GOD and money?

I am absolutely certain hedge fund managers and investors suffer from low blood pressure …

Posted by hsvkitty | Report as abusive

Felix,

You say in the video “Shorting is a form of leverage….”

I don’t understand.

Is going long also a form of leverage?

Posted by dedalus | Report as abusive

dedalus, leverage is another word for debt. Shorting involves borrowing stock: if you’re borrowing something, then you’re levering yourself up. And if you short a stock, you can always lose more than your original “investment”, however that’s defined. That’s what I mean by leverage.

Posted by FelixSalmon | Report as abusive

Thanks Felix.

I can grant everything you say but I’d like to try clouding your view if possible. And to do that I want to riff on an idea propounded by Robert Shiller in his book, “The New Financial Order” (2004).

In that book Shiller says that we ought to think of ourselves as being “long” all sorts of different unhedged risks.

So, and I’m paraphrasing, he suggests that persons employed in particular industries (like Wall Street) ought to be short some quantity of index-related ETF shares (like XLF), in order to hedge against the possibility that their employer (Bear Stearns, Lehman Brothers, etc.) might one day collapse.

So, borrowing stock in order to sell it short doesn’t leave one “net short” but rather “hedged.”

What do you think?

(Shiller proffers lots of interesting ideas; I’m not doing them justice.)

Posted by dedalus | Report as abusive

Sure, leverage can be put to use in the service of hedging, of course. But just because you’re hedged doesn’t mean you’re not leveraged. Just ask Goldman Sachs.

Posted by FelixSalmon | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/