Hedgies, 130/30 managers prepare for month from hell

Asset consultants spent yesterday digesting ASIC’s 30-day short-selling ban, but hedge fund managers and vendors of equitised long/short strategies were resigning themselves to lean times for at least the next month.

“We won’t be winning a lot of new business, will we?” said Don Hamson, head of Plato Investment Management, of the marketing prospects for his boutique’s Australian Shares 130/30 Fund over the next four weeks. The Fund’s existing short positions, which ASIC has decreed remain valid, were also under pressure yesterday. “A lot of the rubbish has risen significantly this morning so we’re certainly not outperforming today,” Hamson said. However he said that prices would eventually move to reflect true valuations, and that his clients (which include Russell and ING Optimix multimanager funds)had been supportive in discussions yesterday morning. “I can understand a shorting ban on financial stocks, reputation is important to them, and if everyone’s worried that a bank’s share price is going down and they all want to take out their money, then there’s legitimacy in protecting against that. But why does an ABC Learning need this kind of protection? Parents are still going to send their kids to the child care centres, shorting cannot undermine its fundamentals.” A doyen of Australia’s hedge fund industry, Damien Hatfield, said the blanket ban on shorting was a “massive retrograde step”, the lack of industry consultation was “outrageous”, and that global investors would be repelled by the “kneejerk reaction” of the regulator. “The attention given to short selling in Australia is a furphy, there’s only ever been a really limited pool of stock available to borrow. The hedge fund community has no problem with a ban on naked short selling, but to ban all shorts for thirty days – the market neutral funds in particular will suffer. Some of the other strategies will be okay because they can still use options and futures contracts, but a lot of managers will need to unwind their books to some degree and its super fund members who will lose out.” Ann Byrne, chief executive of ACSI, said that the association had not been in favour of naked short selling all along. Brokers would now have to think about how they gather the information so they can report at the end of each day. She said ACSI encouraged all parties to work towards improved transparency which supported a competitive and sound governance framework for investment markets. The joint IFSA/ACSI statement yesterday did not indicate whether either body felt that the ASIC move to ban all short selling, rather than just naked shorting or shorting of financial stocks only, was good or bad. John O’Shaughnessy, deputy chief executive of IFSA, said: “We have identified a range of issues pertaining to market liquidity, potential mandate breaches, efficient price discovery and prudent disclosure. We will be liaising with the regulators and the ASX on the interim measures as we seek clarification and further guidance to issues as they arise.” Byrne said that ASIC needed to think about how it would handle trading when the 30-day period was up. Mercer’s Tony Cole agreed that an “enormous amount of pressure” would build up in the markets over the next 30 days and that new rules should be phased in gradually. He said that Mercer-advised funds had taken no action as yet (“our funds don’t tend to change their minds within 24 hours”) but that the consultant had questioned its managers on their exposures to all of the high-profile credit crunch casualties, as well as their susceptibility to the various shorting restrictions and bans now in place around the world. Watson Wyatt’s Graeme Miller and Frontier’s Allison Hill indicated they were at a similarly early stage of digesting the changes and deciding on any strategic changes with clients. Mercer’s Cole said that while managers might be able to use options and futures to replicate a short position, he doubted that many managers “would want to be seen acting against the spirit of what the regulator has intended”. Ron Bird, professor of finance at University of Technology Sydney, said that investors needed to be able to short stocks as well as go long because, in theory, all the good news was in the market but not the bad news if they couldn’t short – “it’s not symmetrical”. He added that there was probably a need for a circuit breaker in the current environment where some stocks, such as Macquarie, were being shorted to a “ridiculous” level. “Maybe there’s a good reason to break the circuit for a while but if this results in a more permanent restriction on shorting then it’s not good for the market,” he said.