The ethics of shorting and the risk of “infinite” losses
Summary
The market for short selling is a well-developed, relatively large and liquid one in Australia, but the practice of ‘shorting’ remains controversial and raises several issues that investors need to consider. These include questions on the ethics of short selling and the risk of “infinite” losses if the company’s share price rises rather than falls.
“Part of the ethical conundrum associated with short selling can be explained by the fact that short-selling creates a different set of beneficiaries to those who benefit from holding long positions in shares.”
Mark McClatchey, Executive Director, Active Large Cap Equities
To maximise our returns from active share portfolios IFM Investors employs short selling judiciously and with a number of strict controls to help us manage the inherent risks involved in shorting stocks and help insulate IFM’s portfolios from the potential of an “infinite” shorting loss. We believe they have also contributed to the much more symmetric and better behaved stock contribution from shorting that has flowed into the performance of IFM’s portfolios in recent years.
About the author
Executive Director, Head of Research - Active Equities
Mark McClatchey
Joined in 2016
Mark is Head of Research for the firm’s Active Equity Team, with responsibilities for research, team management, portfolio management and corporate assessment. Mark has a 31 year track record in equity markets. He previously spent more than 16 years at AMP, where he was Head of Multi-Strategy Research. Mark headed-up the team from 1999, expanding into long-short investing and establishing an Asia-Pacific market neutral strategy. Mark was also the Head of Investment Risk for AMP Capital Investors from 2006 to 2012 and helped pioneer the development of an enterprise-wide analysis of risk, including both listed and unlisted assets. As part of this role Mark was a permanent member of the Investment Committee of AMP Capital which continued to 2015. In 2015, Mark’s role transitioned to focus on improving the investment process and managing the research effort – particularly factor investing. Prior to AMP, Mark worked on the ‘sell-side’ with HSBC and ANZ McCaughan/Capel Court Powell. Mark was one of the pioneers of quantitative investing and research in Australia. His focus on equity markets started in 1986 when he joined Morgan Grenfell. Previously, he was a graduate auditor for EY before moving to John Swire & Sons, Mitsubishi and Keywest in treasury and accounting roles.