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Monday, 22 September 2008
Hedge Funds Plan to Sue FSA Over Short-Selling Ban
A group of the world’s biggest hedge funds are planning to sue the Financial Services Authority for millions of pounds of losses incurred as a result of the regulator’s ban on short-selling last week. More in comments... View PDF
Hedge funds plan to sue FSA over short-selling ban
By Louise Armitstead 20 September 2008
A group of the world’s biggest hedge funds are planning to sue the Financial Services Authority for millions of pounds of losses incurred as a result of the regulator’s ban on short-selling last week.
Lawyers are being galvanised on behalf of a raft of hedge funds which claim the financial watchdog has illegitimately extended its powers and caused “wide-spread capital destruction.”
One said: “The FSA’s remit is to maintain orderly markets - the markets were working fine, only the banks were going bust. With one swoop, the regulators have wiped out perfectly legitimate businesses and have cost some funds millions. They have gone for the big political hit without a thought for the damage they are wreaking. There may be unintended consequences but it’s outrageous and illegal.”
The backlash follows a week in which the multi-billion pound hedge fund industry has been plunged into crisis. Prime brokers in London estimated that 35 per cent of European hedge funds were organising emergency measures to avoid closing funds as a ban on short-selling has hamstrung managers at a time when they need flexibility to survive.
In the US last week Christopher Cox of the Securities and Exchange Commission said the US regulator was committed to using “every weapon in its arsenal to combat market manipulation that threaten investors and capital markets.”
But managers are furious that the regulators have not taken time to introduce more targeted measures. One said: “Short-selling is used for a raft of reasons, not just betting on stocks going down. Sure, there are some evil market manipulators, but this ban has trashed legitimate businesses from options trading, convertible funds and a range of risk management strategies.”
Another said: “It’s too easy to blame hedge funds. The real culprits are the banks which were cavalier in their lending, and the investment banks which were irresponsible in the way they packaged the loans and pumped them round the world. It’s also the regulator’s fault for not picking it up, not ours.”
One prime broker said the sector was in “absolute chaos”; another said there is “a bloodbath out there.”
The collapse of Lehman Brothers, the ban on short-selling and the surge in global markets has created a lethal cocktail for funds. The most recent figures from HSBC private bank showed that some hedge funds are nursing losses of as much as 50 per cent this year, with many funds having dropped more than 10 per cent last week alone. Insiders said some of the best-known funds, including Och-Ziff, Atticus, RAB Capital and Tosca are nursing heavy losses.
Alex Salmond, the Scottish first minister, gained wide-spread attention by pronouncing that HBOS had been “forced into a merger by basically a bunch of short-selling spivs and speculators”.
One manager said: “This shows an embarrassing lack of knowledge and is little more than a cheap and irresponsible trick to whip up a public frenzy.”
Hundreds of thousands of trades have been frozen as a result of Lehman going into administration. The result has caused unnatural market movements as hedges have been forced to cover trades themselves. For instance, Lehman held huge positions for hedge funds that held short positions in Volkswagen in Germany.
After the positions were frozen last week, hedge funds have been forced to buy the stock back in the markets, causing VW to soar more than 50 per cent.
As a precaution against further bank failures, hedge funds have withdrawn millions of pounds from Morgan Stanley and Goldman Sachs, which together command 60 per cent of the global prime broking market.
One said: “We’ve had emails from clients demanding to know our exposure to Morgan Stanely and Goldman Sachs. Imagine if one of these was frozen like Lehman and you had to tell your client that you had left their money in?”
Tim Steer of New Star said: “What matters now is not what company you own but who owns that company. Valuations have gone out of the window. Now you have to look at the shareholder register and work out who’s going to be forced to sell. If it’s a long-only blue chip stock, that’s OK, if it’s owned by hedge funds, then watch out.”
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Hedge funds plan to sue FSA over short-selling ban
By Louise Armitstead
20 September 2008
A group of the world’s biggest hedge funds are planning to sue the Financial Services Authority for millions of pounds of losses incurred as a result of the regulator’s ban on short-selling last week.
Lawyers are being galvanised on behalf of a raft of hedge funds which claim the financial watchdog has illegitimately extended its powers and caused “wide-spread capital destruction.”
One said: “The FSA’s remit is to maintain orderly markets - the markets were working fine, only the banks were going bust. With one swoop, the regulators have wiped out perfectly legitimate businesses and have cost some funds millions. They have gone for the big political hit without a thought for the damage they are wreaking. There may be unintended consequences but it’s outrageous and illegal.”
The backlash follows a week in which the multi-billion pound hedge fund industry has been plunged into crisis. Prime brokers in London estimated that 35 per cent of European hedge funds were organising emergency measures to avoid closing funds as a ban on short-selling has hamstrung managers at a time when they need flexibility to survive.
In the US last week Christopher Cox of the Securities and Exchange Commission said the US regulator was committed to using “every weapon in its arsenal to combat market manipulation that threaten investors and capital markets.”
But managers are furious that the regulators have not taken time to introduce more targeted measures. One said: “Short-selling is used for a raft of reasons, not just betting on stocks going down. Sure, there are some evil market manipulators, but this ban has trashed legitimate businesses from options trading, convertible funds and a range of risk management strategies.”
Another said: “It’s too easy to blame hedge funds. The real culprits are the banks which were cavalier in their lending, and the investment banks which were irresponsible in the way they packaged the loans and pumped them round the world. It’s also the regulator’s fault for not picking it up, not ours.”
One prime broker said the sector was in “absolute chaos”; another said there is “a bloodbath out there.”
The collapse of Lehman Brothers, the ban on short-selling and the surge in global markets has created a lethal cocktail for funds. The most recent figures from HSBC private bank showed that some hedge funds are nursing losses of as much as 50 per cent this year, with many funds having dropped more than 10 per cent last week alone. Insiders said some of the best-known funds, including Och-Ziff, Atticus, RAB Capital and Tosca are nursing heavy losses.
Alex Salmond, the Scottish first minister, gained wide-spread attention by pronouncing that HBOS had been “forced into a merger by basically a bunch of short-selling spivs and speculators”.
One manager said: “This shows an embarrassing lack of knowledge and is little more than a cheap and irresponsible trick to whip up a public frenzy.”
Hundreds of thousands of trades have been frozen as a result of Lehman going into administration. The result has caused unnatural market movements as hedges have been forced to cover trades themselves. For instance, Lehman held huge positions for hedge funds that held short positions in Volkswagen in Germany.
After the positions were frozen last week, hedge funds have been forced to buy the stock back in the markets, causing VW to soar more than 50 per cent.
As a precaution against further bank failures, hedge funds have withdrawn millions of pounds from Morgan Stanley and Goldman Sachs, which together command 60 per cent of the global prime broking market.
One said: “We’ve had emails from clients demanding to know our exposure to Morgan Stanely and Goldman Sachs. Imagine if one of these was frozen like Lehman and you had to tell your client that you had left their money in?”
Tim Steer of New Star said: “What matters now is not what company you own but who owns that company. Valuations have gone out of the window. Now you have to look at the shareholder register and work out who’s going to be forced to sell. If it’s a long-only blue chip stock, that’s OK, if it’s owned by hedge funds, then watch out.”
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