With the lifting of the ban on covered short selling of all but financial stocks from tomorrow, investors and managers may be counting the costs and wondering whether there was any benefit from a ban which extended further than those imposed by all other western governments.
Managers and funds alike have been circumspect in their public comments during the ban, with only one or two exceptions. Indeed, it was difficult for a reader of the joint press release from IFSA and ACSI in response to the initial announcement on September 21 to ascertain whether the two organisations thought it was a good thing or not. The two bodies thought better disclosure was positive but called for more consultation with industry before further such decisions.
AIMA (Alternative Investment Managers Association, Australian chapter) chair, Kim Ivey, and Plato chief executive, Don Hamson, were both publicly critical of the ban, especially when it was extended from one month to two.
But long/short manager Tribeca Investment Partners decided to refrain from commenting until the ban was lifted. Tribeca is a net long active extension manager (such as 130/30) competing in the Australian equity space versus the traditional hedge fund managers that are more market neutral. David Aylward, Tribeca managing director, said yesterday that it would be very important now for the world to see that Australia’s regulatory environment had “settled down” which should enable markets to function in a more orderly and efficient manner.
During the ban, investors potentially paid too much because the other side of the equation – the short side – did not get a voice, he said.
“If the price is wrong, it’s bad for investors” as Tribeca believes the pricing inefficiency resulting from the ban may not have reflected the true value of the shares.
Sean Fenton, who runs the firm’s alpha-extension fund, said banning short selling had not shielded investors from volatility. There had been an increase in buy/sell spreads, reduced liquidity, and lower volumes.
“It’s difficult to know what the precise impact has been,” he said. “The market has plummeted by 20 per cent since the ban was introduced. Prices have fallen because of de-leveraging, redemptions and good old panic.”
Work by Tribeca shows that the daily high/low range of the median stock in the index has almost doubled during the ban period.
“It is too much to say that this was caused by the shorting ban as volatility spiked globally as credit markets froze in the wake of the Lehman Brothers collapse,” Fenton said.