Short Selling – The Good, The Bad and the Ugly January 10, 2023

Short Selling – The Good, The Bad and the Ugly

In this article, we will explore the idea of Short Selling:

  • Legendary Trades done by hedge funds
  • Importance of Short Selling
  • Strategies
  • How to gain short exposure

Short Selling – The Good, The Bad and the Ugly

The Idea of Short Selling

“Buy Low, Sell High”, a commonly heard strategy based on taking advantage of the appreciation / depreciation in price of the underlying asset. Let’s take it a notch up, and review a strategy that functions on the fall in price of the underlying asset, “Selling High first, Buying Back Low”. Are you familiar with this trading strategy?

The idea of short selling is to borrow the underlying asset, sell it and buy the underlying asset in the future at a lower price to return it, benefitting from the difference in the selling price and buying price [1]. The maximum potential profit of a short position is 100% (when the underlying asset goes to a price of $0). However, the maximum potential loss is infinite as there is no upper cap to limit how high the underlying asset price can go.

Legendary Short Sellers & Stigma

Many consider short selling a taboo.

In 2008, the Securities and Exchange Commission (SEC) reactively enforced 2 temporary riles to constrain short sellers who were blamed for some of the patterns in the stock price movements during the financial crisis that began in March that year. As the market deteriorated that year, short sellers were blasted for thriving while everyone else was at its wit’s end. Short sellers benefit from the collapse in the prices of the underlying, ranging from a company’s stock price to a nation’s currency.

For example, the most Legendary Currency Short Seller George Soros, also known as “The man who broke the Bank of England”, raked in $1 billion pounds in profits by shorting the British Pound heavily, forcing the British Government to withdraw from the ERM (European Exchange Rate Mechanism) [2]. The chart below shows the magnitude of the drop of GBP/USD between late 1992 till early 1993.

Short Selling – The Good, The Bad and the UglySource:

From 1997 to late 1998, Asian countries like Thailand, Indonesia and South Korea were hit badly by hedge funds led by George Soros’s Quantum Fund, Julian Robertson’s Tiger Fund and other hedge funds that joined the speculation [3]. At first , the Bank of Thailand (Central Bank of Thailand) attempted to stabilise its currency (Baht) by using a foreign currency like the US dollar to purchase Baht in the foreign exchange market. This would have increased the value of the Baht artificially by causing an increased demand. Furthermore, this would have increased interest rates for the Baht and restricted foreigners’ access to the Baht to fight speculators. In the short run, this strategy pumped the value of Baht up. However, as the Bank of Thailand’s foreign reserves dried up, it attracted more hedge funds and speculators to short the Thai Baht even more. Without foreign reserves to defend the Thai Baht, the bank devalued the currency while the hedge funds profited, leaving Thailand in a currency and financial crisis. This signalled the start of the Asian Financial Crisis, which spread to other emerging Asian markets around the region.

Short Selling – The Good, The Bad and the UglySource: Scope Markets

Importance of short selling

Even though short selling benefits from the drop in the underlying price, it is necessary for more efficient price discovery. Short selling allows downward pressure from sellers to be represented in price discovery as it is one of the key functions of a market. Buyers and sellers can influence the underlying price to better reflect their view on the fundamental price. This is compared to markets that ban short selling, so that only the buy side influences the price, causing the underlying price to be skewed and biased. It is shown that in markets that allow short selling, asset prices are closer to their fundamental value compared to exchanges that do not allow short selling [4].

Short Selling – The Good, The Bad and the UglySource: CNBC [5]

Furthermore, short sellers are incentivised to identify malpractice and fraud in companies, engaging in due diligence, auditing and investigative work, identifying companies that are defrauding investors and customers such as Enron, Wirecard AG and Valeant just to name a few [6].

While overall markets were obsessed with Wirecard and wanted a piece of it, Safkhet Capital (a short-only fund) found that it (Wirecard) was actually indulging in illegal practices and deciding to short their stock. However, regulators such as BaFin did not look into the allegations of illegal practices in Wirecard. Instead, they went after the short sellers for possible market manipulation; they even went to the extent of banning short-selling in Wirecard entirely [7].

These are regular occurrences in hedge funds for short-sell as well as major short-selling players, as they face criticism and are blamed for crashes and the failure of companies. However, without short sellers revealing fraudulent businesses, they would be akin to parasites to the market, causing more harm to the investing community in the long-run.

Strategies that short sellers utilise

Hedge funds that specialise in short-selling do their fundamental analysis to determine if the underlying company is overvalued. The hedge fund will then publicly announce their short position and publish a short report stating their underlying reason for going short [9]. The short report will cover the bearish outlook and any negative aspect of the company in an attempt to convince other market participants to sell their shares, or go short as well to push prices down to the fundamental price that the hedge fund desires. This is a more public approach as hedge funds are not required to disclose short positions in their quarterly filings. Therefore, publicly announcing their short positions and publishing the short report can help push prices down, but can also cause the hedge fund to be the target of a short squeeze.

Short Selling – The Good, The Bad and the UglySource: The Business Times :

Strategies against short sellers

A short squeeze is a strategy that aims to put pressure and ultimately force the short seller to cover his position by increasing the price of the shorted company’s shares. As short positions are generally traded on margin, a significant increase in the share price will cause the short-seller to get a margin call forcing him to cover his short position by buying back shares in the open market, further pushing prices up even more. A short squeeze on illiquid counters that have a large amount of short interest can cause the system to collapse.

The best example for this is the short squeeze on GameStop in January 2021, where the short interest for the GameStop stock was at a record 140% of the total public float. Individual investors and some hedge funds decided to short squeeze the short sellers of GameStop by purchasing and pushing the price up, resulting in an explosion in stock price from $17 USD (at the start of the month) to a pre-market price of over $500 USD [10]. This is seen in the graph below.

Short Selling – The Good, The Bad and the UglySource: POEMS Platform

This shows the risk of using short sell as a strategy, namely the risk of being short squeezed and being forced to close the trade at a loss.

Which products allow you to gain short exposure?

There are multiple ways to gain short exposure to the underlying asset.

Short selling

Clients are required to locate and borrow the underlying asset (usually shares) before selling them in the open market. This may require some time and cost as well.

Inverse Exchange Traded Funds (ETFs)

Clients can purchase an inverse ETF to gain a short exposure on the underlying asset. An Inverse ETF tends to compound daily returns and the lowest price an inverse ETF can go to is $0.

Contract For Difference (CFD)

Clients can purchase a short contract using CFDs. They are not required to locate/borrow any shares as the contract is cash settled. Furthermore, they will enjoy the benefits of leverage and a wide selection of counters such as FX, index, equities and even commodities to choose from.

Daily Leverage Certificate (DLC)

A Structured Financial Instrument offers investors 3x to 7x of the daily performance of the underlying asset (compounded daily) and has a finite lifespan.

The table below outlines both the advantages and disadvantages of each method.*

Product Leverage Margin Mechanics Life Span Settlement
CFD Up to 20x As low as 5% Difference in Opening and Closing No Fixed Date Broker Specific
Inverse ETF 1-3x No Daily Compounded No Fixed Date Exchange
DLC Up to 7x No Daily Compounded Finite Exchange
SBL ~3x 30% of the Market Value of borrowed Securities Difference in Opening and Closing No Fixed Date Broker Specific

*Based on products that are available for purchase on the POEMS platform, other platforms may vary.


For market participants interested in short selling, CFD offers the ease and access to higher leverage to fit most trading strategies. CFD also offers counters ranging from Indexes and Equities to FX and even commodities, allowing market participants to gain both long and short exposure to fit their needs.

Want to kickstart your CFD journey? Here is a promotion for you! *

Short Selling – The Good, The Bad and the Ugly

From now till 31 January 2023, get a free PlayMade bubble tea worth S$5 when you open a CFD account with us! Additionally, you can stand a chance to win a 3D2N staycation when you open an account, fund and trade with us! For more information, click here to learn more.

*Terms and Condition Apply.



These commentaries are intended for general circulation. It does not have regard to the specific investment objectives, financial situation and particular needs of any person who may receive this document. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of the units and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. Investors may wish to seek advice from a financial adviser before investing. In the event that investors choose not to seek advice from a financial adviser, they should consider whether the investment is suitable for them.

The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries.

Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned.

Contact us to Open an Account

Need Assistance? Share your Details and we’ll get back to you


This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <> for more information in relation to the dividend distributions.  

The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

This advertisement has not been reviewed by the Monetary Authority of Singapore.  


Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
Tel: (65) 6230 8133 Fax: (65) 65383066