In Defense Of Hedge Funds And Short Selling: GameStop, Reddit, And Robinhood

Does Wall Street gain at the expense of the little guy? Yes. Is this gain via hedge funds and short selling? No.

Image credit: FEE composite | Fox News - Gage Skidmore from Peoria, AZ, CC BY-SA 2.0

The fallout from the Robinhood/GameStop (GME) saga has led to the usual finger pointing at the wrong parties as a result of political tribalism. But it would be helpful to have some truth and reality, and understand who is and isn’t responsible for what.

Let’s start with short selling. Political pundits like Fox’s Tucker Carlson stated the following:

“Short selling has no obvious value to the American economy….short selling hurts companies, obviously, it hurts its investors, its employees, ultimately it hurts our country itself.”

Like most political statements today, this is a mere assertion with no basis in fact.

Short selling involves the borrowing of a stock in order to be able to sell it without owning it, and buying it back later and returning the borrowed shares to the lender of the stock. But it is still just selling a stock. One can buy a stock and sell it later, or sell a stock and buy it later. A change of order in the process does not make it harmful. If selling a stock before buying it is bad, then selling a stock after buying it is bad, too. Both involve selling (and buying!).

There is nothing wrong with betting against a company if one deems it to be an inferior competitor that will not survive. Why not make bets that Sears, Kmart, Blockbuster, Pan Am, Polaroid, or that horse and buggy company from 1910 will not survive?

Short-selling stocks with poor prospects serves to accurately value companies according to their actual economic viability, providing balance to the market place and keeping things stable by preventing companies from being overpriced.

In futures contracts there necessarily must be a seller on the opposite side to the buyer who thinks the price is going lower instead of higher. Is the seller of a cattle contract bad because she thinks the price will go lower? No, she is merely trying to value the commodity appropriately by keeping prices in check with respect to the underlying fundamentals. She might have identified that prices had run too high during a time of a supply crunch given the limited amount of supply reduction that actually exists.

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Kel Kelly has been an economist and trader for more than 25 years. He is the author of The Case for Legalizing Capitalism.

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