Argonaut Capital chief blasts BoE governor in defence of short-selling

London Stock Exchange

Argonaut Capital Partners, the London-based European equities-focused long/short manager, has hit back at recent criticism of short sellers by the new governor of the Bank of England, adding there is “no evidence” that the practice is harming the UK economy.

Barry Norris, Argonaut’s founder, CEO and CIO, said short sellers have been aggregate buyers – not sellers – of shares during recent market turmoil, and said BoE governor Andrew Bailey’s understanding of short selling is “extremely naïve” for someone in his position.

Addressing Bailey in a note on Monday, Norris wrote: “Contrary to your belief, shorts are in the best interests of the UK economy: without them you would have a more dishonest stock market and a dangerously limited choice of savings product.”

Shorting – a core element of most typical hedge fund strategies – came under closer scrutiny during last month’s violent stock market slide, which was sparked by the global spread of Covid-19.

Bailey, who took over as Bank of England governor from Mark Carney on 16 March, told BBC News in an interview last month: “Anybody who says, ‘I can make a load of money by shorting’ which might not be frankly in the interest of the economy, the interest of the people, just stop and think what you’re doing.”

By playing the role of “market vigilante”, short-sellers can often expose fraudulent management practice, market dishonesty, and poor business models, and should therefore be “encouraged” by regulators in order to curb wrongdoing, said Norris, who founded Argonaut in 2005.

The UK’s Financial Conduct Authority last month ruled out a shorting ban, as market regulators in Italy and Spain temporarily curbed the practice to stem selling pressure following heavy equity losses.

“There is no evidence that short selling destroys good businesses or is currently damaging the UK economy,” Norris said. “Companies go bust not when their share price falls but when they run out of cash.

“If stocks fall precipitously, a good short seller will normally be buying not selling. Over the past few days I have been closing short positions and buying high quality stocks at knock-down prices.” 

He added: “Given that the wider industry is currently dealing with redemptions, we might surmise that any patriotic buying supporting the market is in fact being done by the pantomime hedge fund villains of the Mayfair.”

Norris, lead manager of the Argonaut Absolute Return and Argonaut European Alpha funds, and co-lead on the Argonaut European Income Opportunities strategy, said the firm’s short book has been used as a hedge rather than a directional negative bet.

While such short bets have proved to be “hand break” on hedged strategies’ returns during the long equity bull run, the recent stock market collapse has powered Argonaut’s strategies to “fresh highs”, beating the market by 50 per cent and “demonstrating the value of a positive uncorrelated return.”