Processing Knowledge

The definition of hedge which is most suitable for the financial sector is “Hedge: To shelter one’s self from danger, risk, etc.” One of the oldest forms of hedging in insurance, where the insurer insures the life and or assests owned by the person. Similarly, hedge funds are financial instruments that are used to hedge the investment in securities from the volatile behavior of the markets. Lately Financial researchers and KPOs have started sharing their research on the various financial instruments with hedge fund managers.

Short Selling

Short Selling: An Example

The practise of short selling was first observed in 1609 and has been banned by many markets before the 19th century.  An example of short selling is as follows. Alice borrows the 10 shares worth $5 each of company X from Bob for a day. Bob has decided not to sell the 10 shares for another 6 months as he speculates that the share price will go up. Alice should ensure that she returns 10 shares of company X to Bob by the end of the day. Alice sell the 10 shares for  $50 ($5 each) at the begining of the day as she knows that some bad news shall bring the price down to $3. As she predicted, the price falls to $3.50, and she buys the share for $35. She gives $5 to Bob and keeps $10 to herself.

Hedge Funds and Short Selling:

Short selling is on of the techniques used by hedge fund manager to hedge the risks involved in their long term investments. The wikipedia article on hedge funds gives a nice example of hedge funds and how short selling is used. The importance of investment data becomes really critcial while predicting the price ranges of securities, hence KPOs have entered into the business of sourcing financial data