As an investment banker, I have regularly met with a number of professional investors. Each of these professionals had a unique style and focus. These included hedge funds, mutual funds, vulture funds, money market funds, debt funds, real estate funds. And even funds!
I am always surprised by one simple fact. Investment funds are more than stocks!
That’s right. For each stock traded in the markets, there is at least and usually more than one fund. And each of these professional investors has the same goal as you and me. We are all trying to make money in the market.
Most of these funds use a tool in their arsenal that is not used by individual investors (so far, if you’re smart). These professional investors are much more likely to occupy the shorts market.
The concept of closing the market is simple, but can be quite complex. An investor can short a single stock, a specific industry or even an entire market. Obviously they are trying to sell high and then buy back at a low price. This is how they make money in a reduced market.
So how do they do it?
There are several ways to reduce. You can borrow shares from your broker. . . if you have a large account, you are entitled to a margin and your broker wants to lend you shares. Another way to market shorts is to buy a put option. If you calculate these options correctly, the profit potential is huge, but remember that all options have an expiration date. Finally, there are ETFs that are designed for the shorts market.
Professional investors usually take a short position for one of two reasons. The first is to hedge or protect the investments they already have. Another reason is to make a profit.
There are a group of funds called long-term funds that do this all the time. These funds take the money they manage and invest in stocks that they think are growing. Then they borrow money and short stocks, in their opinion, fall.
Often these funds dedicate a fixed amount to each position. Some of the most popular long-short funds are also called 100% / 30% funds. This means they borrow 100% of their capital and then borrow another 30% to go to market. The idea is that even in the market up there are stocks that are falling. If they are right in both directions, they can make big money.
So how can an individual investor do the same without borrowing money?
Until now, it was difficult for an ordinary investor to manage his portfolio as a “long-short” fund. But now there are a number of new products available for this. So how do you safely go short?
The easiest way I’ve found is short ETFs (sometimes called reverse ETFs). This new type of ETF is designed to increase value when markets fall. Like stocks, they can be bought and sold throughout the day. Now here’s the best. Unlike stock shorting, if you buy a short ETF, there is no risk of a margin call.
Proshares is one of a number of companies that create short ETFs. I like them because they have over 35 different short ETFs. They classified these short ETFs into four different categories. The largest group is ETFs with market capitalization, which allows you to short the Nasdaq 100, Dow, S&P 500 and a number of Russell indices. These market capitalized ETFs are great to use when the whole market is falling.
They also have investment style ETFs that allow you to short stocks based on a specific investment strategy. They can be used if one strategy is expected to be ineffective over the next few months. The third category is the International ETF. You can short various markets including Xinhua Market in China, the Japanese market and a basket of other emerging markets.
The last way, and my personal favorite, is sector ETFs. Here I see the greatest value for individual investors. These ETFs give you the ability to short a specific sector. You can choose which industries you think may fall in the coming weeks and months, and easily profit from it.
Proshares currently has 11 different industries including consumer goods, finance, healthcare, real estate and technology.
These ETFs are not for everyone. However, they can be an exciting way to increase the yield of your portfolio in a declining market.