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FCA rules out short selling ban as hedge funds stack up bearish bets

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The UK’s Financial Conduct Authority last night (23 March) ruled out a ban on short selling, as many major hedge fund firms continue to weigh in with bearish bets to capitalise on the recent global market turmoil.

The UK market watchdog said on Monday there is “no evidence” that short selling – a core component of most hedge fund strategies – had driven recent market falls, adding aggregate net short selling activity is low as a percentage of total market activity and has decreased in recent days.

The notice comes as many well-known hedge fund firms including as Crispin Odey’s Odey Asset Management, Gladstone Capital Management, Man GLG, and Marshall Wace have made gains with successfully shorts in a range of names amid the recent downturn.

“A great many investment and risk management strategies rely on the ability to take ‘long’ and ‘short’ positions,” the FCA said in a statement last night. “These benefit a wide range of ordinary investors including the pension funds for employees of companies and local government.”

The regulator added: “We also note that short selling is a critical underpinning of liquidity provision. The loss of these benefits would need to be carefully balanced before determining that any intervention to prevent short selling was appropriate.”

Marshall Wace, the renowned USD28 billion London-based long/short equity hedge fund firm set up by Sir Paul Marshall and Ian Wace in 1997, has built key short positions in a range of companies hit by the Covid-19 outbreak – including Cineworld, TUI and EasyJet. #

GLG Partners meanwhile is negative on names such as Whitbread and Sainsbury’s.

The FCA noted the pattern of short selling is likely to fluctuate, adding it will continue to monitor market activity closely and would “take all actions within our power where necessary to safeguard orderly markets”, in cooperation with its counterparties globally.

Earlier this month, the UK watchdog temporarily curbed short selling in certain Italian and Spanish stocks, in line with similar measures taken by market regulators in those countries, following large stock market losses in Milan and Madrid.

“While there has been significant volatility in market prices over the past weeks as a result of the impacts of coronavirus (Covid-19) and this may continue for a period, markets have continued to operate in an orderly fashion in the UK,” the FCA added.

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