overvalued stocks - hedge funds ;book5 pg 57 regarding, stocks, details, its

tarunajwani

this is regarding equity market neutral style - hedge fund (HF)
given overvalued stocks, HF will try to capture alpha by shortselling the overvalued stocks. Operationally, how is this executed? Correct my understanding and add few more details -
Say, HF will short-sell say 100000 stocks of IBM (overvalued). Do they do it in derivatives segment or cash segment of th market? if its in cash segment, how will they complete obligation to sell 100000 stocks on the settlement day? Do they seek securities borrowing for that, assuming HF don’t have so much of position in IBM stocks. How does it work, if they do it in derivatives segments?

b_sea93

Like was stated above
1. Get a borrow from your prime broker on the IBM shares
2. You then execute the trade in the market
3. On settlement, you receive the cash proceeds from the sale and the prime delivers the shares on your behalf.
Typically there is a cost or a rebate on the shorting of stocks that depends on how easy the shares are to borrow and the rate schedule you have with your prime.