Hedge funds whining...and no, the villagers aren't scared...they're pizzed, and rightfully so.
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Hedge Funds Say Short-Selling Restrictions Will Hurt Markets
Last Update: 9/19/2008 12:27:09 PM
By Joseph Checkler
OF DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The Securities and Exchange Commission's decision to ban
short-selling on 799 financial company stocks has a profound effect on hedge
funds, who think the short-term action will harm long-term markets.
Even with the stock market and financial stocks sharply up the last few days, it
is still impossible to determine how many short sellers have covered their
positions. That could soon change, as the SEC starting Sept. 29 will make large
money managers report their short positions in some stocks every week. Long
positions of less than 5% have to be reported quarterly, 45 days after the end of
the quarter.
"Why should a short sale have different rules than a long trade?" said a New
Jersey-based hedge fund manager who sells stocks short, though not financials.
Besides the new reporting requirements and the ban on the financial shorts, he
complained that, unlike long positions, selling a stock short for over a year
gets taxed as a short-term investment.
David Friedland, president of hedge fund of funds Magnum U.S. Investments and
also of the Hedge Fund Association, said, "in extreme times, extreme measures are
understandable."
That said, the ability to short is critical for the market in the long run, he
said. "It provides liquidity, and keeps checks and balances in place by
preventing investors from ramping up stocks," Friedland said.
"Villagers Get Scared"
One West Coast hedge fund manager called the new rules an "assault" on short
selling, and said it's being overlooked that most short-sellers are only betting
against certain stocks as hedges to their long positions.
"When the crop is bad, the villagers get scared and someone is going to have to
be blamed," the manager said. "The regulators will naturally overreach and do
more harm than good."
The new guidelines, he added, "will hurt the market's long-term price discovery
by impairing short selling."
Anecdotally, one manager told Dow Jones Newswires that a close friend of his,
also a hedge fund manager, saw an entire year of gains erased on Thursday when
the stock prices of his shorts skyrocketed.
Several hedge funds have been beating the market by shorting financials the past
18 months, including the fund of PayPal co-founder Peter Thiel, Clarium Capital
Management, which was up 40.3% in 2007 and 47% through July, according to
investors. Clarium had been shorting financial stocks, but also the Financial
Select Sector SPDR (XLF) exchange-traded fund. That ETF is still trading at a
price correlated to its underlying securities, so it is unclear whether the
short-selling ban is affecting it. |
