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Realty Income Corporation Message Board

  • IamreallyWildcatF4F IamreallyWildcatF4F Nov 13, 2009 10:27 AM Flag

    Understanding Short Selling by Hedge Funds

    I admit that I don't have a good knowledge of short selling....and am therefore requesting help from posters on this board to help educate me on this subject....especially shorting by hedge funds.

    First of understanding of "shorting" is that someone sells assets (in this case shares in O) that they don't really own. To do this legally, shares of O must be borrowed from a third party. To sell shares without borrowing them from a third party is called naked short selling....and this is illegal, is monitored by some agency...and theoretically punished.

    Anyhow the short seller hopes to profit from a decline in the price of the assets he is this case the share price of O.

    Now my question is this: How do hedge funds (or anyone else) manage to sell short? Are they borrowing shares of O from their broker? Or do they get a legal "special break" from some agency...and are therefore allowed to practice naked short selling to their heart's desire?

    Where is the SEC in all of this? Are hedge funds checked up make sure that they are playing by the same rules as the retail investors? Don't we, as small retail investors. have the right to have a "level playing field" on which to make our investments?

    Is the SEC the right organization to look to to prosecute cases of naked short either hedge funds or any other entity or individual? It seems odd to me that (to the best of my knowledge) no prosecutions for naked shorting have been or are being least I haven't heard of any....

    Your thoughts and enlightening comments will be appreciated.


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    • Ackman, (aka Uckman),
      likely took his little win, and covered..

      He did not put on his position after he announced..

    • If you look at his position in General Growth Properties he uses a lot of total return swaps. My guess is he has done that here as well.

      I am long both CXW and GGP. Frankly I also agreed with his short position in O until the disclosure issue was taken away.

      Anyway -- Ackman claims to be pairing his short in Reality Income against his long position in CXW. Whatever - I dont buy the REIT analogy that is made by Ackman re CXW. A prison is not an apartment complex. If you drive by one you can readily see that. Maybe he can go visit his hedge fund buddies in one soon and ask them personally if a prison should be valued like an apartmetn REIT. They may be able to help him out... Anyway I am long CXW so whatever works...

      I dont track short interest as well as you do, but I am not surprised. Ackman has blasted his "short thesis" all over the internet, had it run in Barrons (I am dissapointed in Barrons for the way they have shilled for these highly publicised Ackman positions) and has given it at a conference. This is a crowded trade... Anyway because he uses Total Return Swaps in other positions I assume he used them here as well and they don't show up in the short interest data.

      No matter how you slice it -- shorting O is a crowded trade. O is not my kind of stock and I do have a problem with the valuation on an implied cap rate basis however -- if you consider the following O is not a good short candidate:

      1)Strong balance sheet -- everybody agrees with this.
      2)Reasonable dividend coverage
      3)Business model that has worked for 40 years
      4)Expertise in working with distressed tenents

      None of this is indispute.

      Ackman's "short thesis" (a very pretentious way to describe it) is predicated on TWO things happening:

      1)Retail investors fleeing the stock
      2)Dividend cuts

      *BOTH* of these have to happen for Ackman to see his implied cap rate go to 12% (which I agree is where it should be).

      Even if there are dividend cuts - i think ackman's assessment of the behavior of retail investors in this scenaio is not realistic. I dont think they will rush out of the stock if the dividend gets a cut. It is far more likely that the highly levered hot money that is short the name will rush to cover if the stock continues to go the wrong way then it is that long term retail investors will rush out the door. Ackman should think panicked sophisticated hot money messing up his short position rather than comparably stable and rational retail investors rushing out helping it.

      His argument is simply not based in the observable facts of how the world works.

      They screwed the pooch.

    • BuysValueac, you said:
      "Valuation alone simply is not enough. Experienced short sellers know this. I would have assumed that Ackman did -- guess not."

      The problem is (regarding Ackman's shorting O) that when he announced his short position the share price immediately dropped 7%...just because he announced his short position.

      It's like a bunch of kids are playing on the playground...and a big bully comes by and just because he can....shuts the playground down. The kids then go home....and the bully has the playground all to himself. Why should this one individual be permitted by the system to have so much power?

      Personally, I think it's possible that Ackman may have been irritated that O was not releasing the information that Ackman wanted....that is, who were/are the leasees of O's properties?

      Another problem with some they come closer to losing money on their short position....they get desperate and start putting out more and more false and misleading information....often ending up with allegations of cooking the books. I've seen it happen in the past. Hopefully these kind of allegations will be more closely monitored than in the past and prosecuted where appropriate.

      I have no idea (other than what was in Ackman's presentation at the Texas conference) what motivated him to short O....nor do I have any idea how he will react if the share price rises above $25.50...which as I recall is about where the price was before his short position was announced.


    • Buysvalue-you must know that 22.01% of O shares are short. which is a 7.67% increase from last week.
      My guess is, they are all underwater, don't know though.
      At some point they are going to have to cover, do you have an idea what that trigger may be?
      CXW closed at 24.92, if O passes CXW in share price, does that create a problem for some shorts?

    • just for U F4F wildcat

      and for short lovers,
      here's what it is like when your flying and come up SHORT!

    • Check-Regulation SHO Threshold List-on, to find out more, btw, O is not on the list.

      • 1 Reply to z99oo
      • The basics are pretty much as you describe -- but there are lots of ways to take a short position in a name like Realty Income.

        Ackman uses total return swaps a lot. You can take a short position by selling a total return swap. If you spend some time googling you can learn about those.

        You can construct short positions with options by buying puts, selling calls or doing this in various combinations. You can google put options and selling call options to learn more.

        You can sell the stock short as you have described.

        You can buy the credit defaults swaps on the company's debt. I would tend to doubt that he did this his bear arguments are pretty much contained to the common equity.

        My guess would be that Ackman has used total return swaps and sold the stock short in some combination.

        A fund like Pershing Square would use an institutional brokerage for execute these transactions and have some financial insitutation to take the other side of TRS and or CDS trades.

        In anyevent since he has been so public with his postion I think that we can fairly well rest assured that whatever he has done is legal. I think it is also I'll advised but that is another topic..

    • Your thoughts and enlightening comments will be appreciated.<<<<

      sounds like you understand the issue very well..

      perhaps a letter to you senator or congressmen or SEC (now that Cox and friends are out),
      in order?

      during the past few years naked shorting did occur, and the problem goes very deep, from brokers who took trades without shares to loan, to SEC and DOJ for doing nothing to contain the problem.

      dark markets are dangerous to all

      hedge funds simply have the capital it takes to do some serious damage especially when they get together and tag team like alley thugs or so called show time-wrestlers..

      good post..

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