Net Short: What Is It?
The total positioning of a portfolio, whether it is in terms of individual stocks or across asset classes, is referred to as net short. In terms of overall value, an investor who is net short has more short positions than long positions.
Recognizing Net Short
A net short position suggests that an investor may retain a certain asset for a long time, but is generally short on it. For instance, an investor who owns shares of a corporation can decide to enter a short trading position utilizing options that are worth more than their ownership. In this instance, the investor is net short on the stock for the duration of the option, despite holding shares and presumably believing in the long-term value of those shares.
Similar to this, an investor can be net short in a certain sector while yet owning shares of a few businesses in that sector that they are comfortable investing in. The investor in this instance is net short and negative on the industry as a whole, but is confident in the long-term viability of the main companies.
In a net short portfolio, the total value of the short positions exceeds the total value of the long holdings; hence, the quantity of positions is less significant than the value they represent. The price of the underlying asset declines, which is advantageous for investors who are net short. Net short positions experience losses as the value of the underlying asset rises.
The opposite of a net long position, in which the entire investment position is based on the assumption that the price of the underlying asset, sector, or market will rise, is a net short position. Occasionally, traders will assign short positions a higher share of their portfolio than long positions. Because investors are borrowing securities from brokers and selling them on the market with the intention of repurchasing them at a cheaper price in the future, this sort of portfolio will rise as the values of the underlying securities decline.
Net Short Example: The Quantum Fund of George Soros
The technique of net short positioning has been developed by hedge funds and speculative traders. George Soros engaged in one of the great net shorts against the pound sterling (GBP).
With a sizable wager on the pound, Soros’ premier fund, Quantum Fund, was net short on currencies. However, there were also long positions on British equities, German bonds, and the German deutschmark included in that position. Soros made money from the large short position when the Bank of England (BOE) was “broken,” as well as from the accompanying market shake-out that caused the mark to increase and capital to transfer to British stocks and German bonds. 1
In other words, unlike a net short position on the S&P 500, a net short position does not have to wager on a market’s overall fall. In the right hands, net shorts can adhere to an intricate investment thesis to ensure the greatest profit through interspersed long bets that are beneficial to the overall short position.