The ethics of shorting and the risk of “infinite” losses

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.

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.