Net Short: What it is, How it Works, Example

What Is Net Short?

Net short refers to the overall positioning that an investor has in their portfolio, whether it be in individual securities or across asset classes. An investor who is net short has more short positions than long positions in terms of overall value.

Understanding Net Short

Net short implies that an investor may have long-term holdings of a particular asset, but is short on it overall. For example, an investor may hold shares of a company and choose to enter a short trading position of the company using options that exceed their holdings. In this case, even though the investor holds shares and presumably believes in the value of those shares long-term, the investor is net short on the stock for the term of the option.

Similarly, an investor can be net short in a particular industry while still holding investments in a few companies in that industry that they feel confident in. In this case, the investor is bearish on the overall industry, hence net short, but certain that key companies can pull through long-term.

A net short portfolio has more short positions than long in terms of overall value—the actual number of positions, in this case, is not as important as the value they represent. Investors who are net short benefit as the price of the underlying asset decreases. If the price of the underlying asset increases, net short positions lose money.

Net short is the opposite of a net long position, where the overall investment position is betting on a price increase in the underlying asset, industry, or market. Sometimes traders will attribute a larger proportion of their portfolio to short positions rather than to long positions. This type of portfolio will increase as the prices of the underlying securities decrease because investors are borrowing securities from brokers and selling them on the market in the hope of buying them back later at a lower price. 

Net Short Example: George Soros's Quantum Fund

Hedge funds and contrarian traders have made an art of net short positioning. One of the great net shorts was carried out by George Soros against the British pound (GBP).

Soros' flagship fund, Quantum Fund, was net short on currency with a huge bet placed against the pound. However, within that position, there were also long positions on British stocks, German bonds, and the German deutschmark. So when Soros "broke" the Bank of England (BOE), he profited from the massive short position, as well as from the subsequent market shake-out that saw the mark appreciate and capital shift to British stocks and German bonds.

In short, a net short position doesn't have to bet on an overall decline in a market, like a net short position on the S&P 500. Net shorts, in the right hands, can follow a complex investment thesis to secure the maximum profit through intermingled long bets that are complementary to the overall short position.