The Alternative Investment Management Association, the London-based hedge fund industry association, has spoken out against calls for a ban on short selling of bank stocks in the wake of t
The Alternative Investment Management Association, the London-based hedge fund industry association, has spoken out against calls for a ban on short selling of bank stocks in the wake of the proposed takeover of UK mortgage provider HBOS by Lloyds TSB. But hours after the association announced its position, the UK’s Financial Services Authority announced such a ban starting at midnight on Thursday.
Aima says short selling is a legitimate practice integral to maintaining efficient, liquid markets whose benefits have been endorsed by the UK’s Financial Services Authority, other financial market regulators and government ministers, and it should not be confused with illegal market abuse, which it condemns.
The association says short selling is a technique used by the wider asset management industry, not just by hedge funds, typically to reduce risk to investors and achieve returns when most asset classes are declining in value.
Aima believes that banning shorting on banks would not have the desired effect, and would also have an impact on other perfectly legitimate market activity where a bank short is merely one part of a bigger trade.
A ban, the association says, would only slow down inevitable price discovery, and in the meantime allow a false market to persist with an overvalued stock price. Paradoxically, it would also undermine capital-raising because of the role shorting plays in underwriting rights issues. A better solution, Aima argues, would be to ensure that proper information is provided to the market by banks so that the market can value an equity accurately.
‘Short selling is not the real cause of the decline in HBOS share value, nor are hedge funds to blame for wider, exceptional market volatility,’ says Aima chief executive Florence Lombard. ‘The true cause appears to be a widespread lack of confidence by all investors in financial markets related to much deeper market issues.
‘These issues include excessive lending practices by banks and an inflated property market on both sides of the Atlantic. We once again recommend that markets are looked at in their entirety and that any review should include all relevant players within these markets, not just hedge funds.’
Aima has more than 1,280 corporate members in 47 countries including hedge fund managers, fund of hedge funds managers, prime brokers, providers of legal and accounting services and fund administrators.
