Why would a hedge fund with Short and Long securities have dividend expense on the income statement?

Question

Why would a hedge fund with Short and Long securities have dividend expense on the income statement?

Answer 1

Simply because they are long some stocks, does not preclude them from having to pay the dividend on stocks they are stock.  A Long and Short fund is not short and long the SAME set of stocks, they sell the weaker stocks in an industry and buy the stronger ones.  If their short positions pay dividends, they must cover the cost of the payment.

It is important to note that this DOES NOT IMPACT your P/L.  When a stock pays a dividend, the stock price is adjusted by that same amount.  So if you pay out a $.20 dividend, the stock will also be revalued $.2 lower (and then subject to supply/demand), which makes up for the dividend paid.  Its a wash for both parties.

Answer 2

Always a hedge fund basher in the crowd somewhere...

- R

Answer 3

they don't collect multi-million dollar bonuses from not charging you fees.

Answer 4

If you have a short position, you are responsible for the dividend on that stock because the person that bought it from you is entitled  to the dividend; and since shorted stock is borrowed stock the person that it was borrowed from is also entitled to the dividend.  So the person shorting the stock pays the dividend.

Answer 5

You shorted stock.

You sold it to A.

You needed shares to deliver to A so borrowed some from B.

Now A and B both think that they are entitled to dividends, but the company only issued one set of shares, so is only paying one dividend (to A).  You need to pay "cash in lieu of dividend" to B which may be larger than the actual dividend because "cash in lieu" does not qualify for favorable tax treatment as a qualified dividend would.  This last bit is because the IRS is only going to allow dividend that the company actually pays out and is not going to allow people to manufacture tax favored income.