Sorry I didn’t see this until now. Thanks for the sincere reply.

When a hedge fund shorts a stock, they are required by law to locate shares to borrow. They call around and find who has shares to lend and at what rate. They agree to borrow those shares at that rate.

There is no version of that conversation where they say “hey could we just short without locating?” That is a fiction. Many on here are pushing it who must know better. It does not happen. They always pay to borrow shares which they locate, the same as you or me.

Does that mean that short interest cannot exceed 100? No. There are other market participants, options market makers for example, who have the same requirement to locate and borrow but more flexibility on the timing. They have to hedge order flows in puts/calls that show up, and the only way to do that is through long and short positions in the underlying, and they have to do it immediately. So they have more flexibility on when the shares must be located. This is a large effect in something like GME which has had massive options activity recently!

It is also true that the lender must reasonably believe that shares will be there to lend, but they can be wrong! This results in a naked short position that will then have to be closed. This could happen to you or to a hedge fund.

There are a couple of hedge funds who also are options market makers and people worry they may abuse the regulations. There is no evidence of this, they have separations between their businesses, and there are only 2 of them that I know of. So those using this to justify broad claims are intentionally misleading people.

So no, hedge funds do not have any special way to naked short. They locate shares and they pay a borrow. Those saying otherwise are muddying the waters.