CHAPTER 5Short Selling and Leverage

To achieve their objectives, hedge fund managers use a “toolkit” that contains the following tools:

• Short selling

• Leverage (borrowing)

• Derivatives

It should be made clear that many hedge funds do not use any of the tools while others only make use of one or two of these tools, and even then to a limited extent. In addition, these tools are not unique to hedge funds and are extensively used by banks, investment banks, and, to a limited extent, by mutual funds. However, these tools are closely associated with hedge funds that tend to use them more regularly than other firms. Also, the tools are more central to the strategies and business models pursued by hedge funds than, say, mutual funds, where they ...

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