Shorting Facebook: Nerves of Steel or Simply Stupid?

For these contrarian kings, either fortunes are made or careers are ruined

CEO Mark Zuckerberg of Facebook. (Photo: AP) CEO Mark Zuckerberg of Facebook. (Photo: AP)

"I have no interest in shorting a cultural phenomenon," hedge fund manager Jeffrey Matthews of Ram Partners told Reuters in an e-mail interview about the Facebook IPO.

Asked if this was because such stocks trade without regard to normal market valuation, he wrote back, "Bingo." Facebook closed its first day of trading on Friday, up only 23 cents, at $38.23.

As the hysteria continues over the most expensive technology IPO in Wall Street history, Matthews might reflect popular (and sane) sentiment, yet the news service notes certain investors are laying the groundwork for a Facebook short.

Short sellers looking to get in “are facing an uphill battle.” Traders that Reuters interviewed said the stock is going to be hard to borrow, at least for a few days, and only the best-sourced hedge fund managers will able to find lenders.

A prime broker at one of the top underwriters of the IPO said the firm will not be lending shares at least until the initial settlement in three business days.

"I don't know how many shares will be available for shorting," the broker, who requested anonymity, told the news service. "We would only provide them once the deal has stabilized."

Those who are able to short will need “nerves of steel,” according to the news service. The borrowing cost will be high, and short-sellers may find the trade hard to get out of by buying back the stock in the open market, and could face a lender calling in their shorts if the stock rallies sharply.

Still, some started preparing to short Facebook well before trading started.

"I'm doing the legwork now and calling all the brokers," a hedge fund manager told Reuters earlier in the week. "Goldman and Credit Suisse are our prime brokers, so I am in contact with them about this."

"This is about as bubbly as you can get," he added. "My mother asked me if she could get Facebook shares and she has never been interested in IPOs before. A cab driver asked me about the IPO, too. That's when you want to short it."

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