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Investing in Hedge Funds, Revised and Updated Edition by Joseph G. Nicholas

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CHAPTER 14
Short Selling
MANAGERS WHO USE short selling strategies seek to profit from a decline in the value of stocks. The strategy involves selling a security the investor does not own in order to take advantage of a price decline the investor anticipates. Managers borrow the securities from a third party in order to deliver them to the purchaser. Managers eventually repurchase the securities on the open market in order to return them to the third-party lender. If the manager can repurchase the stock at a lower price than for what it was sold, a profit is made. In addition, managers earn interest on the cash proceeds from the short sale of stock. If the price of the stock rises, the manager incurs a loss. This strategy is seldom used as a ...

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