Short Selling is Essential to Corporate Bond Markets

Short sellers are often painted with a broad brush as trying to profit from the demise of corporations, but a huge percentage of short interest is actually coming from hedgers who are combining short equity positions with long positions in other parts of the capital structure. Michael Kao of Akanthos Capital management has decades of experience with these sorts of trades and has seen first-hand what can happen when short selling is unavailable to manage relative value and capital structure arbitrage bets. Citing the effect of short-selling bans on convertible bond and credit markets during the GFC, Kao explains why these explicit bans and even derisking due to short squeeze attacks can lead to liquidity crises in much more illiquid parts of the capital structure.