Shorting Facebook on first day: Tough even for the gutsiest

As the hottest initial public offering in recent memory, Facebook has drawn 1990s-style tech-mania interest from mom and pop investors and big institutions alike.

That intense appeal means even short-selling veterans are a bit wary, at least for now.

"I have no interest in shorting a cultural phenomenon," hedge fund manager Jeffrey Matthews of Ram Partners in Greenwich, Connecticut, told Reuters in an email interview.

Asked if this was because such stocks trade without regard to normal market valuation, he wrote back, "Bingo."

Short sellers looking to get in are facing an uphill battle. Traders interviewed said the stock is going to be hard to borrow, at least for a few days, and only the best-sourced hedge fund managers will able to find lenders.

A prime broker at one of the top underwriters of the IPO said the firm will not be lending shares at least until the initial settlement in three business days.

"I don't know how many shares will be available for shorting," said the broker, who requested anonymity. "We would only provide them once the deal has stabilized."

The bigger-than-usual percentage of retail-investor ownership of the shares may make shorting more difficult, as those investors don't tend to lend their shares for those who want to take a short bet.

"It will likely be difficult to get shares to borrow," said Adam Reed, professor of finance at UNC Kenan-Flagler Business School in Chapel Hill, North Carolina.

"In our research, we found that around 70 percent of IPOs are borrowable on the first day, but many of those names were only borrowable by well-placed investors."

The stock priced at $38 a share Thursday.

Those who are able to short will need nerves of steel. The borrowing cost will be high, and short-sellers may find the trade hard to get out of by buying back the stock in the open market, and could face a lender calling in their shorts if the stock rallies sharply.

Still, some have started laying the groundwork to short Facebook well before trading started.

"I'm doing the legwork now and calling all the brokers," said a hedge fund manager earlier in the week. "Goldman and Credit Suisse are our prime brokers, so I am in contact with them about this."

"This is about as bubbly as you can get," he said. "My mother asked me if she could get Facebook shares and she has never been interested in IPOs before. A cab driver asked me about the IPO too. That's when you want to short it."

The hedge fund manager asked not to be named as he expected to be involved in trading the stock on Friday.

Some hedge funds, remembering the heady days of the tech bubble in the late 1990s, have been sensing the blood in the water in the recent flurry of social media and networking IPOs, including Groupon , LinkedIn , and Zygna .

Many believe those stocks' valuations are too high, given expectations for their growth and revenue outlook. Should shares surge to $70 or so in short order, it will be an opportunity for managers when the initial flurry of retail interest fades in coming days or weeks.

However, Facebook may be an exception.

"I think it's going to be an extraordinarily successful IPO and it's going to be a must-own stock institutionally, besides the massive retail demand, for obvious reasons - it's the dominant factor in social media, social networking," said Doug Kass, president of Seabreeze Partners in Palm Beach, Florida.

Kass hasn't been afraid of shorting hot IPOs in the past - he made quick, short bets on LinkedIn in the initial days after it began trading in May 2011. That stock had a small float of just 7.84 million shares, compared with the 421 million shares Facebook sold.

At the $38-a-share IPO price, Facebook would trade at over 100 times historical earnings, versus Apple Inc's 14 times and Google Inc's 19 times.

Even among the skeptical, there is a good deal of caution in facing down what is likely to be a stampede. As economist John Maynard Keynes famously noted, the market can stay irrational longer than investors can stay solvent.

"Facebook is the kind of stock that, if you don't like it, you simply avoid it," said Mohannad Aama, managing director at Beam Capital Management LLC in New York.