“Hedge funds have certainly had an influence but I think investors are starting to learn to see beyond the simplistic view, you know -‘hedge funds are shorting this company, it must be in trouble’. They are looking at the fundamentals and making up their own minds.”
Natalie Floate, head of securities lending at BNP Paribas Securities Services, says transparency will stop criticism of securities lending when there is a market event, but it won’t stop a market event from occurring. “If everyone had disclosed their short positions in the companies that have experienced massive price drops so far, the same thing would have happened,” she says. “These were highly leveraged business models with some key dependancies that caused the concerns and short selling sometimes speeds up the price discovery `process.”
Nevertheless, the ASX and ASIC are investigating anecdotal accounts of some short sellers acting in concert and possibly trading on inside information. Early last month ASIC was approached by a number of market participants concerned that some individuals were deliberately spreading false information about listed securities to artificially provoke sales and lower market prices.
Most custodians are sceptical. “That’s one hell of a conspiracy theory,” says one. “If they [long managers] believe so much of the market has been driven down, go in and buy it, you’re getting it at a bargain. But they know that that’s not really the reason the shares have fallen. There’s a bit more to it than that. There are macroeconomic factors. It’s not just short selling. I just don’t buy into this conspiracy theory, I just don’t reckon there’s a whole group of hedge funds who get together around the world and say this is what we’re going to do, we’ll nail these guys. Go back to anyone of these companies and you can point out some fundamentals no matter where they were. They would have got caught, they over-geared too much.”
In or out?
Equipsuper’s Burns doesn’t credit the conspiracy theories around securities lending either, but still thinks the lack of transparency is enough reason to temporarily halt his fund’s lending program. However, the lending agents don’t think it will make any difference.
Spitalfields’ Faulkner says two or three funds in the Australian market have stopped lending, but are having virtually no impact upon the securities lending business or market prices, because there is good liquidity in the securities lending business. “What those lenders are doing is forgoing the opportunity to generate revenue from securities lending, creating some smaller operational issues for their lending agents, and probably making it unlikely that they will be able to return to the lending market any time soon. To some extent one could uncharitably say they are cutting of their noses to spite their faces. They will make no difference.”