Shorts are often (usually) a legit way to reduce risk - if the stock falls, you’re not losing everything. But that’s less entertaining to report about, so you rarely read about this in the non-technical news.

Yes but those aren't naked shorts. You don't get short interest in 140% of the total shares available from people hedging their holdings. That did happen with GME and it's what the r/WSB people picked up on.

> You don't get short interest in 140% of the total shares available from people hedging their holdings

Of course you do. I buy a share. I loan it to you. You sell it short. That buyer pledges it to a third person. Et cetera.

The person who borrowed sold naked then. Covered would be if you they a protective call option no ?

And if it doesn't fall you lose money. You can't just reduce risk without also reducing gains.

> You can't just reduce risk without also reducing gains.

You can (assuming you haven’t exhausted all available independent investment opportunities with equivalent risk/reward profile) reduce risk without reducing expected gains.

Doing so (assuming you were investing suboptimally for your the prior risk level and expected returns) involves reducing in the part of the distribution above the mean offsetting the increase in the part below the mean.

Buying a 10% interest in each of 10 lottery tickets (ignoring practical risks associated with deals to split winnings) doesn't reduce your gains compared to buying one lottery ticket, it just reduces your risk.

This is the whole point of diversification.

But in the case of something like a pension, reducing risk is often the goal, right?

The goal is to make enough money for pensioners to live off.

If the goal was to reduce risk then pensions would be better off being held in cash. But pension funds dont have enough cash to meet needs so they have to grow.

Pension pots actually often do follow a path of minimising risk, with the percentage held in cash and government bonds increasing as pensionable age nears.

They have a specific percentage growth targets which gets adjusted periodically based on interest rates and life expectancy.

I am far from the most knowledgeable HNer on this topic, but my understanding is that pension funds are more conservative than most, but that they do get involved in riskier asset classes as well. They probably allocate a portion of their assets to hedge funds or VCs because otherwise they miss out on lots of upside. Of course, there can be downside as well...

holding a hedged portfolio (with shorts) is less risky than a long only portfolio in the vast majority of cases.

Moreover some asset that is risky on it's own can decrease the risk of the entire portfolio. From a quantitative perspective, specific risk from an asset is largely irrelevant (and doesnt carry a risk premium), because it can be diversified away to 0