The rationale behind short selling is to profit from a fall in the price of a particular security (e.g. share, index, exchange traded fund). From time to time, Platinum applies an active short selling strategy for a Fund and the level of short selling will differ between the Funds. Platinum may use short selling to reduce a Fund’s net invested position and to take opportunities to increase returns.
Platinum generally utilises equity swaps to short sell. A swap is a derivative contract, in which two parties (counterparties) agree to exchange payments of value (or cash flows) for another. Normally, they are cash settled non‑deliverable contracts (i.e. settled for a profit or loss).
In taking a short position, Platinum expects the asset to depreciate although there is a risk that the asset could appreciate. Unlike a long security, losses can exceed the amount initially invested.
The risks associated with short selling are managed in the same way as the risks associated with holding a long security, that is, thorough research, daily reporting and ongoing monitoring of positions held.
Short Selling Example (loss)
Platinum short sells (via a swap agreement) 10,000 shares of ABC @ $100 and closes the position when the share price rises to $120 by entering into an equal and opposite trade.
Trade
| No. of Shares
| Share Price
| Total Income/Cost ($)
|
---|
Opening Sell
| 10,000
| 100
| 1,000,000
|
Borrowing cost and commission
|
|
| (200)
|
Interest receivable
|
|
| 250
|
Closing buy
| 10,000
| 120
| (1,200,000)
|
Loss
|
|
| (199,950)
|
There will be additional costs and revenues from borrowing costs, commissions and the return of dividends.
Short Selling Example (profit)
Platinum short sells (via a swap agreement) 10,000 shares of ABC @ $100 and closes the position when the share price falls to $80.
Trade
| No. of Shares
| Share Price
| Total Income/Cost ($)
|
---|
Opening Sell
| 10,000
| 100
| 1,000,000
|
Borrowing cost and commission
|
|
| (200)
|
Interest receivable
|
|
| 250
|
Closing buy
| 10,000
| 80
| (800,000)
|
Profit
|
|
| 200,050
|
There will be additional costs and revenues from borrowing costs, commissions and the return of dividends.