The Hong Kong stock market is getting 'shorter' as investors turn bearish on equities because of fears of a recession which will hit corporate earnings and see share price falls. Profits may be made in such a market by 'short-selling' or 'going short'. This involves borrowing stocks from a third party (usually a broker), and then selling them with the intention of buying the shares back at a lower price in order to return them to the lender at the end of the contract period, and pocket the difference in the prices. In the Hong Kong market such short selling is closely regulated, and 'naked' short selling, or going short without first borrowing the stock, is not permitted. Such short-selling has been on the rise since analysts began downgrading their forecasts for growth over the next 12 months, and large institutional investors have begun withdrawing from equity markets. Under a tide of selling, the benchmark measure of Hong Kong stock prices, the Hang Seng Index, has fallen 13.37 per cent since the beginning of this month on low turnover, indicating little liquidity going into trading shares. However, in contrast to trading, short selling volumes have risen to 2008 financial crisis levels. According to the Securities and Futures Commission's (SFC) latest weekly report, short selling turnover in the week of August 15 to 19 was higher than in the months of the 2008 crisis. Average daily short selling turnover during the week was HK$7.6 billion, constituting 10.3 per cent of the total market turnover, said the SFC. The overwhelming majority of short-sellers are proprietary trading firms, hedge funds, and institutional investors, but a number of Hong Kong brokers such as Phillip Securities said that in recent weeks they had received more inquiries from retail investors on how to short-sell stocks. 'Until now shorting hasn't been very common among retail investors,' said Alex Wong, a director of Ample Finance Group. 'But I can see it becoming more popular now.' To go short, investors have to sign an agreement with a broker before registering it with the Inland Revenue. The tax office charges a registration fee of HK$500 and short-sellers are also required to pay stamp duty. While the broking arms of investment banks and global securities firms offer short selling to hedge funds and other professional investors, not many Hong Kong brokers provide the same service. Short sellers are also asked to put aside collateral with the brokers based on the market price of a stock. For example, using HSBC shares, currently worth HK$65, a short-seller would have to deposit collateral of HK$62,400 to borrow 800 HSBC shares (two board lots of 400 shares each), if the collateral is 120 per cent. If the HSBC share price falls to HK$55, the short seller can opt to cash in HK$8,000 profits from the fall. But if the stock rises to HK$75, the short seller has to pay a total of HK$9,600 to meet the shortfall of the collateral required by the broker, or suffer a loss of HK$8,000. To terminate the agreement, short-sellers have to return the stock by buying shares in the market. 'One advantage of shorting stocks is that you can capture a movement in the stock prices and take a straight gain,' said Steven Leung Wai-yuen, a director of institutional sales at UOB Kay Hian. 'But there's the risk that the lender of the stock might ask for the stock back any time.' But there are other costs involved. Brokers will have administrative, transaction, and borrowing charges. A hedge fund manager, who did not want to be named, said it was sometimes not possible to borrow stock because there were not sufficient shares available. 'I have been asked to pay more than 40 per cent interest on a stock,' the hedge fund manager said. 'I decided it's not worth it in the end.' Brokers said small investors preferred betting on stock price movement indirectly using listed derivatives because the costs were lower. 'Factor in the costs of shorting, and the investment might have to be in the region of at least a few millions to make it worthwhile,' said Simon Yung, a director and head of warrant sales at Standard Chartered.