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Most interesting is that for each of these long positions, there's a short. The key is that these derivatives are synthetic shares of facebook, not true equity

Most interesting is that for each of these long positions, there's a short. The key is that these derivatives are synthetic shares of facebook, not true equity. When available/required, the fund will acquire these shares. The difference btw this and mortgage CDS, is that this is "equity", not debt. That's my reading of it anyway. Here's another attempt at an over-simplified explanation: http://news.ycombinator.com/item?id=1936037 http://news.ycombinator.com/item?id=1936037

roel_v 16y ago
As I understand it, there's no long here; there's no other party promising to pay a certain amount for each share. They just bought options from the people who had them and in case of an IPO, there will be (hopefully) a cash fountain that the investors in this company get to tap into. And if the IPO turns out to be less than whatever they paid for the options, tough luck. In other words, it seems like all assets are paid for already with the inlay of the shareholders of the investment vehicle. So I think that disqualifies it as a long, where no cash changes hands at the time the deal is done, no?
- eru 16y ago
  Depends on how you look at it. The current shareholders of Facebook did not actually sell the stock. They just sold rights to the stock options. So if you net out their position, there's no short. If you do not net out their position, there's a long and an equal short for them, and another long in the new investment company.
  - roel_v 16y ago
    Maybe it comes down to the definition of 'long', I don't know if there is a well-established one. But since these people who the options were bought from presumably have contractual valuations of these options, it seems to me that there is no risk in the deal, except for the valuation at IPO of Facebook stock. Thinking of it, maybe it's the same as a 'regular' long, i.e. a non-naked one (I guess there's a real term for it ;) ) I originally had a mental comparison with naked longs in mind, in which case the risk profiles would deviate much more from the construction in the article; but yes if you compare it to a long on an asset someone already has, it may not be that different. Then again it seems to be that the scary stories and the bad image of shorts and longs are about the naked variants, and that this is implicit in the article. That may just come from my lack of grasp on the subject.

roel_v 16y ago

As I understand it, there's no long here; there's no other party promising to pay a certain amount for each share. They just bought options from the people who had them and in case of an IPO, there will be (hopefully) a cash fountain that the investors in this company get to tap into. And if the IPO turns out to be less than whatever they paid for the options, tough luck. In other words, it seems like all assets are paid for already with the inlay of the shareholders of the investment vehicle. So I think that disqualifies it as a long, where no cash changes hands at the time the deal is done, no?

eru 16y ago
Depends on how you look at it. The current shareholders of Facebook did not actually sell the stock. They just sold rights to the stock options. So if you net out their position, there's no short. If you do not net out their position, there's a long and an equal short for them, and another long in the new investment company.
- roel_v 16y ago
  Maybe it comes down to the definition of 'long', I don't know if there is a well-established one. But since these people who the options were bought from presumably have contractual valuations of these options, it seems to me that there is no risk in the deal, except for the valuation at IPO of Facebook stock. Thinking of it, maybe it's the same as a 'regular' long, i.e. a non-naked one (I guess there's a real term for it ;) ) I originally had a mental comparison with naked longs in mind, in which case the risk profiles would deviate much more from the construction in the article; but yes if you compare it to a long on an asset someone already has, it may not be that different. Then again it seems to be that the scary stories and the bad image of shorts and longs are about the naked variants, and that this is implicit in the article. That may just come from my lack of grasp on the subject.