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Short mutual fund

The idea of a mutual fund manager is to make investments so that their investors can make a capital gain. There are several strategies that the fund manager will execute in order to keep to these goals. One of the strategies employed is called short selling. With the economy in a slump mutual funds investors have had to think about the shares in securities they have and how to protect their investments. When an investor does not want to out right sell their investments because of a declining stock market also known as a bull market, they deploy a strategy called selling mutual funds short. At one time short selling was only available to the individual investor, who invested in one stock, now it is available to mutual fund managers as well.

The idea of selling short is to borrow shares from the mutual funds manager or broker and instruct manager or broker to sell them. The rational for doing this is to take advantage of a declining market. When the shares of the company that was borrowed from decline even further, the investor will buy the share on the open market and they will be cheaper in cost. At this point as long as there are enough shares bought at the cheaper price, the investor can give back the borrowed shares to the broker, or manager and make a profit.

These borrowed mutual fund shares originally come from a pool of funds held by the brokers and belonging to other investors. There are some limitations and restrictions that will apply. For example, the short sellers may be required to cover their positions at any time. The pool in mutual funds comes from inventory and so even though requiring an investor to cover their account is uncommon, it does happen more often then it would when investors short sell actively traded individual stocks. In additional investors wanting to short sell may have to create a margin account, which is basically a credit margin. Short sellers may also be asked to keep about 30 percent of collateral (30 percent of the total value of the borrowed stock) in their accounts at all times. If the prices on the open market rise for the borrowed stock, the broker, or manager may ask more collateral to insure the position of the borrowed shares.

For mutual funds, short selling is risky because the object of a mutual fund is to make money, but in short selling not only is the gamble on the economy getting worse, the gamble is on the particular borrowed stock to dip in value price as well.

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