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Hedgeweek Comment: Short selling ban not the solution

Sticks and stones may break their bones but banning will never hurt them. This new version of an old saying might fit the new restrictions that regulators on both sides of the Atlantic have imposed on hedge funds. Amid massive stock-market volatility that some have blamed, in part, on short selling, the UK's Financial Services Authority last week imposed a temporary ban on short sales in the stocks of banks and insurers.

In the US, the Securities and Exchange Commission also announced it was halting short selling in 799 financial stocks - initially just for 10 business days, although the ban can be extended for up to 30 calendar days.

The London-based hedge fund industry association, Aima, insists that short selling is a legitimate practice and integral to maintaining efficient, liquid markets, and that it should not be confused with illegal market abuse. The association also believes banning shorting of financial stocks will not have the desired effect and will slow down inevitable price discovery, perpetuating a false market with overvalued stock prices.

The UK restrictions are due to last until January 16 but will be reviewed after 30 days. There are unlikely to eliminate short selling - hedge funds won't stop betting on shares declining, but will just target other sectors instead. But if the ban is not lifted or if it is extended to other sectors, you can bet your bottom dollar that hedge funds will come up with other, innovative strategies to counter this move.

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