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Both hedge funds and short take advantage from bearish markets, but what is the difference between them?

  • You misunderstand "hedge funds". "Hedge funds" (and any other entity that 'trades the markets") use both short and long positions, and every sort of instrument. (If you've heard or thought that "hedge funds" are "strictly" about bearish markets, that's not correct.) – Fattie Nov 5 '16 at 14:09
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Hedge funds are a form of fund, an adjective and noun. Short selling is a concept and action, an adjective and verb. Those are the primary differences.

Hedge funds aren't obligated to take advantage of bearish markets, or even hedge their positions. The title is a misnomer related to a distinction created in bygone days.

Short selling is an action. Where someone borrows an asset and sells it for the total amount the market will buy it for, with the idea that they can use those proceeds to buy an identical asset for a much lower price (to give back to the original owner), and keep the remainder of those proceeds for themselves.

An illustrative example would be if you borrowed your friend's iPhone 7 plus and immediately sold it today for $800, and bought another one next year for $500 and gave it to your friend. You keep the $300.

  • But note that you generally have to pay your friend for the inconvenience of his not having the phone for that year, so that $300 isn't all profit and may in fact be a loss. Short selling is very far from being "free money". Never make any kind of investment without fully understanding how it works and what the potential risks are that balance the potential benefits. – keshlam Nov 5 '16 at 8:38
  • @keshlam interest rates are low, it's basically a non issue. Even then, The question was about the concept, there are plenty of ways to be bearish that don't involve borrowing. – CQM Nov 5 '16 at 15:42
  • In the latter point, we are agreed. The former: as always run the numbers and check your assumptions. Today's conditions are today's conditions, and advice based on them may need reconsidering tomorrow. – keshlam Nov 5 '16 at 18:24
  • @keshlam without a discussion on the unlimited upside risk to to short selling, and how that would never fit in an analogy about consumer electronics, I really think your disclaimers/lecture/advice are misplaced,notwithstanding the degree of personal responsibility required of investors – CQM Nov 5 '16 at 21:33
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One is a trade strategy (shorting a security) and one is an investment fund (hedge fund).

It's often said that taking an inverse position to offset the risk of a decline in another position is a hedge strategy (you're hedging your risk). Buying some put contracts on shares you own is a hedging strategy, because it gives you the option to sell your shares at a predetermined price in the event that they lose value, and that's different than taking a short position in a security. Though taking a short position in a security to offset some risk in your portfolio is both a short trade and a hedging strategy.

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