How Do Hedge Funds Short Stocks?
In a recent article, I posted an investment banking pitchbook to give you a sense of what these bad boys actually look like. If you were thoroughly under-impressed by the contents of the pitchbook, I wouldn’t blame you. Pitchbooks are often more about marketing than substantive analysis.
Yesterday’s annual Value Investing Congress provided us with an opportunity to contrast how analysis is conducted at investment banks and how it is conducted by hedge funds.
Broadly speaking, while investment banking pitchbooks present views on valuation and operating forecasts that are generally in line with “street” expectations, value investors seek to identify companies that are improperly valued in the market.
The reason for the difference is that an investment bank makes money via deal fees (taking a cut off the purchase price or stock offering), while a hedge fund gets paid if they generate returns for clients (i.e. they can expect to make money only if they are making good calls).