Hedge Fund Industry Defends Short Selling

by Phillip Morton, Investors Offshore.com

22 September 2008

The Alternative Investment Management Association (AIMA), a global representative association for the hedge fund industry, has spoken out against calls for a ban on short selling of bank stocks in the wake of the proposed takeover of UK bank HBOS by Lloyds TSB.

AIMA argues that short selling is a legitimate practice and integral in maintaining efficient, liquid markets, and should not be confused with the illegal practice of market abuse, which AIMA condemns.

Short selling is a technique that is used by the wider asset management industry, including but not limited to hedge funds, typically to reduce risk to investors and to provide returns when most asset classes are declining in value. The FSA, other financial market regulators, and government ministers have endorsed the benefits of short selling.

AIMA believes that banning shorting on banks would not have the desired effect. Any ban would also have an impact on other perfectly legitimate market activity where a bank short is merely one part of a bigger trade.

AIMA contends that such a ban would only slow down inevitable price discovery, and in the meantime, allow a false market to persist with an overvalued stock price. The association further suggests that a ban would undermine capital-raising because of the role shorting plays in underwriting rights issues. A better solution, it points out, would be to ensure that proper information is provided to the market by banks so that the market can value an equity accurately.

Florence Lombard, Chief Executive of AIMA commented: “Short selling is not the real cause of the decline in HBOS share value, nor are hedge funds to blame for wider, exceptional market volatility. The true cause appears to be a widespread lack of confidence by all investors in financial markets related to much deeper market issues.

She concluded: "These issues include excessive lending practices by banks and an inflated property market on both sides of the Atlantic. We once again recommend that markets are looked at in their entirety and that any review should include all relevant players within these markets, not just hedge funds."

Recommended