A report done by four academics and accepted for publications in the Journal of FInancial Economics, tracks the trading of 105 U.S. companies that borrowed money from hedge funds between Jan 2005 and July 2007.
Key information:
- Average company that receive a new loan from hedge funds saw a 75% spike in volume of short sales during the five days preceding announcement of the loan, as compared with the volume of short selling 60days before the deal
- However, 255 similar companies which turn to banks for loans saw little change in short selling volume
- Short selling also jumped 28.4% before any changes in existing loans from hedge funds as compared to a droped in 17.4% in short selling if the changes of loans was done with a bank
- Short selling after a loan is announced is actually expected as investors and lenders hedge their exposure against the company who will be taking on a debt at a higher rate. (After reading the article, I believe hedge funds charge a higher interest rate as compared to banks)
- Hedge funds know that this 'shorting' will happen and thus do the shorting in advance before the public does it. ( Hence the article starts talking about insider trading and the fact that hedge funds are less regulated than banks)
- I feel that in order for hedge funds to be willing to lend money to companies, it means that they have already scrutinized the companies. ( From my knowledge, I believe that the really smart people work in hedge funds instead of banks, as remuneration is much better, thus I choose to believe that hedge funds do make better decisions that banks) Hence it actually makes sense to buy up these companies' shares when the public are shorting it.
In other news, I attended the Asian Investment Banking Conference 2010 just a few weeks ago. The main thing I got out of the event is that for those people who are thinking of going into investment banking, just stay in Asia. There is no need to go to USA/Europe. This is because, Asia is now the focus for investment banking. The number of cases that you will get to work on is much much more plentiful in Asia (though it might not be bigger), but it does give you more exposure, which is much more important.
Also, for those who would like to get into the front office of a bank, it is better to work in a front office role in a small bank and learn the essential skills which are transferable, than a back office position in a large reputable bank. This is because it is almost virtually impossible to jump from back office to front office.
