The Alternative Investment Management Association, the London-based hedge fund industry association, says it fully supports the desire of governments and financial regulators in the US and
The Alternative Investment Management Association, the London-based hedge fund industry association, says it fully supports the desire of governments and financial regulators in the US and UK to bring the financial sector crisis under control, but expresses regret that the latest rules banning short selling of financial company stocks were implemented without notice or consultation.
‘As clearly acknowledged by governments and financial regulators, short selling is a legitimate component of orderly financial markets, and not to be confused with market abuse,’ the association says. ‘Where regulators have evidence of market abuse and malpractice, they should act on this evidence immediately and bring charges.’
Aima says it welcomes the temporary nature of the Financial Services Authority’s measure barring short selling of UK banking and insurance stocks and calls for the earliest possible review of its efficacy. In the meantime, the association says, it will provide whatever support its members need to ensure smooth implementation of the new rules.
The association, which represents more than 1,280 corporate members in 47 countries including managers of hedge funds and funds of funds, prime brokers, lawyers, accountants and fund administrators, insists it is not alone in doubting whether Friday’s bans on short selling of financial stocks imposed by the FSA in the UK and the Securities and Exchange Commission in the US are likely to achieve the intended results over time.
Instead, it says, the measures could have unintended consequences including an increase in banks’ cost of capital at a time when it is most needed and incorrect pricing of index products, with negative implications for mainstream retail products.
‘We strongly support any measures put forward by regulators and policy makers that will bring equilibrium to financial markets,’ says Aima chief executive Florence Lombard. ‘It is our position, however, that banning short selling of financial stocks, while it may indeed bring temporary relief, creates an artificial market. It will not ultimately, on its own, bring back investor confidence in the banking system.
‘Aima will work with the FSA and other regulators, its counterpart in the US, and its members, to identify long-term solutions. With these misgivings in mind, we call for an early review of the efficacy of the short selling bans and their consequences.’
The Washington, DC-based Managed Funds Association has also expressed its opposition to the SEC’s ‘dramatic’ step of enacting a temporary ban on short selling of 799 financial stocks and an order, also temporary, requiring institutional investment managers to report their daily short positions on a weekly basis.
‘MFA is deeply concerned by the crisis in the global financial markets, but equally troubled by the SEC’s unprecedented actions in response to the crisis,’ says president and chief executive Richard H. Baker.
‘We stand firm in opposing restrictions to short selling and maintain that it is an essential risk management tool and a critical component of ensuring market stability, not a contributor to market volatility.’
The MFA argues that restricting short selling has not been proven to benefit the stocks it is meant to protect. In July, when a first emergency order was enacted by the SEC and subsequently extended, the share prices of the 19 financial companies initially rose but by the time the emergency order expired, the majority had declined in value during the period it was in effect. It remains unclear, the association contends, that the restrictions provided any benefit whatsoever.
The organisation also opposes the SEC’s requirement for institutional investment managers publicly to disclose their short positions, arguing that the requirement does not effectively address the SEC’s concerns and that requiring the disclosure of proprietary information would be harmful to the managers’ investors and their underlying businesses. The MFA says it is seeking immediate exemptions from the rule and clarification on various compliance issues.
‘MFA has been in communication with chairman Cox, the SEC staff and members of Congress and their staffs,’ Baker says. ‘We are committed to working with the SEC, Federal Reserve, Treasury and Congress to provide essential information about the value of short selling to the markets and the economy, and to ensure that this action does not yield unintended consequences or prolong this crisis.’
However, not all hedge fund industry members share Aima’s and the MFA’s presumption that the ban on short selling of financial stocks is likely to have mostly negative effects. According to Jérôme de Lavenère Lussan, a director of London-based Laven Partners Asset Management, the regulators’ actions reflect massive uncertainty about the outcome of the financial crisis.
‘Prices of shares have fallen below reasonable and economic levels, which has a further negative impact on financial institutions by increasing the price at which they can borrow, all of which increases the likelihood of the price falling further until their ultimate demise,’ he says.
‘For some investors it therefore makes sense to short certain stocks. While some market rumours suggest this may be a malicious practice, it is a legitimate investment activity that has in the past demonstrated its benefits for shareholders of some companies. By imposing an overnight ban the FSA will hurt legitimate investors and possibly some hedge funds.’
However, he argues, in the current environment that ban may prove ‘a bold and courageous move’ that might limit a market free fall that would otherwise have a much larger impact on investors and the general public.
‘These are unprecedented uncertain times. The move may not prove popular for investment managers in London and may limit their ability to compete with managers in other jurisdictions, although most traders will trade with prime brokers subject to the new rules.’
