Can someone explain to me how hedge funds bankrupt companies?
In: Economics
Hedge funds exist to mitigate (hedge) risk in other investments. Given that most investments involve holding some asset (called a long position) which is effectively a bet that the asset will go up in value, it is common for hedge funds to bet the opposite way (called a short position). Given that a short position is betting that a company’s value will go down, lots of people shorting a company is a sign that it is in trouble or at least overvalued. This may lead to people who hold that company’s stock selling, which results in the price going down.
If the price goes down too far then the company will need to take drastic action or face bankruptcy.
Additionally some particularly aggressive funds will take out short positions on a company and then publish data which shows that the company is overvalued (e.g. analysis showing that the company’s forecasting is overoptimistic).
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