Tina: Let me put this way: short selling is the practice of selling securities that have been borrowed from a third party, usually a stock broker, with the intention of buying identical securities back at a later date to return to the lender.
Tom: What’s the purpose of doing that?
Tina: Well, the short seller hopes to profit from a decline in the price of the security between the sale and the repurchase. If the price drops, the short seller can buy back the stock at the lower price and make a profit on the difference.
Tom: So the goal of using such a strategy is to generate high returns? From all the stories or cases that I have read or heard, it seems to me that most of the hedge funds are highly speculative.
Tina: Exactly. I know some hedge fund managers like to use some complicated strategies that are highly speculative.
Tom: So does that mean that not all hedge funds can “hedge risk”?
Tina: That is right. Some hedge funds may carry more risk than the overall market because some investment methods are highly aggressive and based on market predictions.
Tom: I suppose that a true hedge fund should be less speculative.
Tina: I totally agree. However, even nowadays, the goal of most hedge funds is to maximize return on investment.
Tom: Isn’t it true that after the financial crisis in 2008, many investment institutions are deleveraging aggressively.
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