"It would be pointless to argue that there is no loss of value from short selling. Common sense tells us there must be. If someone wins, someone must lose…it's not investing, it's a game," says one reader. Another predicts that "short selling is going to be a problem from now onwards and a most attractive field for the dishonest."
Elsewhere, the Daily Mail has argued that "with the British economy in such dire straits, shorting is not only wrong. It is immoral," while the Treasury Select Committee has also got in on the act, criticising hedge funds for profiting from short selling bank shares.
Certainly, many of the arguments the critics raise are valid. Short selling does no favours to the shareholders of the targeted company (although whether it can be blamed entirely for the collapse in banking shares is open to debate). Pension funds have recognised this by cutting back the amount of stock that they are willing to lend out.
And yet there are also advantages. George Soros, writing in the Financial Times recently, argued that "it gives markets greater depth and continuity, making them more resilient." He's been here before; Mr Soros had a high-profile disagreement on the subject of currency shorting with Malaysia's prime minister, Mahathir Mohammad, during the Asian financial crisis of the late 1990s. And he's got a point. Short selling can improve liquidity, resulting in more accurate pricing. More importantly, it increasingly offers private investors the opportunity to protect their portfolios against market falls.
Take two examples. IC columnist Mr Bearbull, normally a long-only investor, has taken . And the largest holding in David Stevenson's Sipp portfolio . Are these the actions of dishonest, immoral people seeking to profit from the suffering of others? Or those of investors seeking to insure the value of their investments in the same way that a homeowner might insure his buildings and contents?
I am no great enthusiast of short selling. The principle of profiting from falling share prices sits uneasily with that of investing your capital in a company with the intention of seeing the value of that company grow. But the advantages and disadvantages of the practice stretch well beyond the caricatured image of the grasping hedge funds profiting from the misery of others, as attractive as that caricature is to Labour MPs and tabloid newspapers. The emergence of instruments such as exchange traded funds, covered warrants and contracts for difference means that private investors are increasingly able to hedge (in the true sense of the word) the value of their investments. After the events of the last 18 months, is that really such a bad thing?
