Leading hedge fund slams short selling restrictions

Sep 29, 2011 by Charles Gubert

Imposing short-selling restrictions is regulatory market manipulation and will not reduce volatility, a portfolio manager at a leading hedge fund has warned.

This comes as French, Spanish and Italian regulators extended their restrictions on short-selling bank shares. The bans in France and Italy will now expire on November 11, 2011 while Spanish authorities have said the measures will remain in place “until market conditions allow it.” Greece, Belgium and South Korea imposed similar limitations in August although they have yet to announce extensions. The UK’s Financial Services Authority (FSA) has repeatedly said it will not stop the practice.

“The bans are counterintuitive and they are exacerbating corporate and systemic risks by highlighting which institutions and countries are seen by regulators to be weak. The price action of some corporations thus far in the third quarter simply displays hedge funds are not the sole investors selling. Long only investors have concerns also,” said Martin Marston, portfolio manager at Nectar Capital’s soon to be launched Nectar Global Alpha Fund.

There is also regulatory arbitrage among member states. France’s short-selling restriction applies only to shares and convertibles while the Spanish ban has extended to derivatives. Much like in 2008 “most hedge funds are still able to benefit from falling share prices via the use of derivative instruments,” acknowledged Marston.

Short-selling bans have been much maligned in many of the post-2008 autopsy reports. In August, the EDHEC Risk Institute said short selling bans damaged liquidity and exacerbated the woes of struggling stock. The UK’s Financial Services Authority (FSA) and the Committee of European Securities Regulators (CESR), the precursor to the European Securities and Markets Authority (ESMA), said short-selling was often a force for good and helped mitigate market risk. Even Christopher Cox, chairman of the US Securities and Exchange Commission (SEC) during the crisis, conceded the three week short selling ban during the height of 2008 was the biggest mistake of his career.

“When short selling bans are imposed, volatility is immediately impacted providing some short-term relief as hedge funds may seek to cover short positions followed by other long-only investor resuming their selling as further corporate and country specific concerns come to light”, said Marston. Despite the shorting ban, several French banks have suffered credit downgrades indicating the futility of the bans.

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Legal , Regulation

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