Hedge funds accept curb on activity but warn artificial market is no cure
• Ban in itself will not bring back investor confidence • Data suggests blame for crisis may be misplaced
By Simon Bowers - The Guardian 20 September 2008
Many leading hedge funds, including some of the most active short-sellers, have reluctantly accepted the need for emergency measures outlawing aggressive bets on falling bank share prices.
The temporary ban on such activity took effect on stock markets in London and New York yesterday after a week in which short-sellers became the subject of a volley of angry criticism accusing them of manipulating the markets.
Florence Lombard, chief executive of the hedge fund trade body, the Alternative Investment Management Association, said: “We strongly support measures put forward by regulators and policymakers that will bring equilibrium to financial markets.”
But she warned that the authorities had not yet addressed the underlying frailties of bank stocks. “It is our position that the ban - 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.”
Her comments come after a week in which senior figures from the political and banking establishment - as well as many newspaper front pages - angrily pointed the finger at hedge funds, many of them based in Mayfair.
The outbursts came before yesterday’s extraordinary stock market recovery during four days of panic trading that saw prices reach levels that bore no relation to the underlying value of listed companies. Shares, particularly bank shares, were ditched at unbelievably low prices as investors stampeded into the perceived safe havens of gold and government bonds. As the week wore on, however, the markets have begun to show indicative data that tells a surprising tale of relatively modest short-selling activity around the most controversial stocks during the past week.
While the figures do point to a late rush of shorting around certain stocks, in many cases these bets look small in comparison with huge short selling activity in preceding months. The latest stock loan data from research group Dataexplorers.com - the best available proxy indicator for short-selling - suggests hedge funds this month increased their short positions in Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs. But in all cases these late bets were a fraction of the scale of short selling seen over the summer.
At HBOS even after very modest short-selling activity early in the week, the figures suggest hedge funds were choosing to bet more on a fall in Barclays share price than in HBOS. Some late short-selling in HBOS appears now to be loss-making.
Many hedge fund experts refuse to accept that short-selling had caused falls in stock markets around the world this week, nor do they believe that yesterday’s record stock market rally had to be the result of the emergency ban on short-selling. One industry insider said yesterday’s markets were being driven by radical proposals being drawn up in the US for a state rescue of the mortgage market.
Not all fund managers absolved short-sellers from responsibility for recent market turmoil. Guy de Blonay, who runs New Star’s £250m Global Financials fund, said: “I’m a hedge fund manager myself, and it will have an impact on what I do. But I can see the national interest and the ramifications for the wider economy. It will help stop a vicious cycle that is forcing one weak entity after the next to sell itself.
At the very least it will delay the worst case scenario.”
At a glance
Short sellers pay a small fee to borrow shares, and immediately sell them in the hope the shares can eventually be bought back at a lower price before they have to be returned to the lender. The difference between sale and purchase prices is the shorter’s profit. When the market tumbles this can be huge - and provoke a public backlash
Many hedge funds choose to buy shares they believe are undervalued and short-sell those shares they judge to be overpriced. Expressing their views in this manner helps the market find the right price for a stock, they argue.
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Hedge funds accept curb on activity but warn artificial market is no cure
• Ban in itself will not bring back investor confidence
• Data suggests blame for crisis may be misplaced
By Simon Bowers - The Guardian
20 September 2008
Many leading hedge funds, including some of the most active short-sellers, have reluctantly accepted the need for emergency measures outlawing aggressive bets on falling bank share prices.
The temporary ban on such activity took effect on stock markets in London and New York yesterday after a week in which short-sellers became the subject of a volley of angry criticism accusing them of manipulating the markets.
Florence Lombard, chief executive of the hedge fund trade body, the Alternative Investment Management Association, said: “We strongly support measures put forward by regulators and policymakers that will bring equilibrium to financial markets.”
But she warned that the authorities had not yet addressed the underlying frailties of bank stocks. “It is our position that the ban - 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.”
Her comments come after a week in which senior figures from the political and banking establishment - as well as many newspaper front pages - angrily pointed the finger at hedge funds, many of them based in Mayfair.
The outbursts came before yesterday’s extraordinary stock market recovery during four days of panic trading that saw prices reach levels that bore no relation to the underlying value of listed companies. Shares, particularly bank shares, were ditched at unbelievably low prices as investors stampeded into the perceived safe havens of gold and government bonds. As the week wore on, however, the markets have begun to show indicative data that tells a surprising tale of relatively modest short-selling activity around the most controversial stocks during the past week.
While the figures do point to a late rush of shorting around certain stocks, in many cases these bets look small in comparison with huge short selling activity in preceding months. The latest stock loan data from research group Dataexplorers.com - the best available proxy indicator for short-selling - suggests hedge funds this month increased their short positions in Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs. But in all cases these late bets were a fraction of the scale of short selling seen over the summer.
At HBOS even after very modest short-selling activity early in the week, the figures suggest hedge funds were choosing to bet more on a fall in Barclays share price than in HBOS. Some late short-selling in HBOS appears now to be loss-making.
Many hedge fund experts refuse to accept that short-selling had caused falls in stock markets around the world this week, nor do they believe that yesterday’s record stock market rally had to be the result of the emergency ban on short-selling. One industry insider said yesterday’s markets were being driven by radical proposals being drawn up in the US for a state rescue of the mortgage market.
Not all fund managers absolved short-sellers from responsibility for recent market turmoil. Guy de Blonay, who runs New Star’s £250m Global Financials fund, said: “I’m a hedge fund manager myself, and it will have an impact on what I do. But I can see the national interest and the ramifications for the wider economy. It will help stop a vicious cycle that is forcing one weak entity after the next to sell itself.
At the very least it will delay the worst case scenario.”
At a glance
Short sellers pay a small fee to borrow shares, and immediately sell them in the hope the shares can eventually be bought back at a lower price before they have to be returned to the lender. The difference between sale and purchase prices is the shorter’s profit. When the market tumbles this can be huge - and provoke a public backlash
Many hedge funds choose to buy shares they believe are undervalued and short-sell those shares they judge to be overpriced. Expressing their views in this manner helps the market find the right price for a stock, they argue.
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