Another 100 Galleons?

At the Federal Reserve Bank of Atlanta’s conference on short selling, there was a fascinating paper presented by professor Nadia Massoud of York University. In it she provided compelling evidence that hedge funds actively short the shares of companies they loan money to directly before the announcement of the loan becomes public and directly before the loan covenants are violated and the terms are made more negative. What I found interesting is that their ability to short on this obviously inside information likely allows them to lend money to companies at a lower rate than a traditional bank as the profit they make from the shorting helps offset the fact that the default likelihood is higher than the rate reflects.

This means that they’re able to win business away from banks by offering a lower rate and then subsidize that rate by basically stealing money from individual investors by trading on the insider information. Based on the research in this paper, which included a robust sampling of hedge fund loans I think it’s extremely likely that the Galleon case is merely the tip of the iceberg.

Comments Off on Another 100 Galleons?

Filed under Uncategorized

Comments are closed.