More UK Vitriol Poured On Hedge Funds

by Jeremy Hetherington-Gore, Tax-News.com, London

26 July 2002

The Financial Times has delightedly seized on the latest short-selling whingeing from the UK's moribund mutual fund sector to continue its anti-hedge fund campaign. The paper reported yesterday that Robert Talbut, the chief investment officer with fund manager Friends Ivory & Sime has called for an urgent regulatory review of the "destabilising influence" of hedge funds on the stock market, saying that short-selling by hedge funds has had a "disproportionate impact" in pushing stock prices lower.

Talbut claimed that with mainstream institutional investors having reduced overall activity this year, short-selling by hedge funds was having a greater influence. This in turn was triggering further selling by investors and further falls. "There is an impression that the tail is wagging the dog," he said.

The UK's Financial Services Authority (FSA), however, said on Monday it had found no rise in short selling during recent market falls, despite calls in the media for the practice to be somehow regulated or curbed.

"We have done some initial analysis which does not suggest an increase in short-selling recently. We do not see short-selling as a problem," Kate Burns, spokeswoman for the FSA told Reuters.

German Finance Minister Hans Eichel in February called hedge funds a threat to financial stability and urged a temporary ban on short-selling, while Japan in March introduced a package of measures aimed at restricting short selling and stock lending.

Corporate notables who have used the FT's readiness to attack alternative investments include David Varney, executive chairman of mobile phone group mm02 OOM.L , who claimed in its columns this week that short selling had become a significant factor in the UK equity market. "Many in the markets and industry believe aggressive short selling is damaging interests of long-term investors," he said.

Varney said that in the eight months since his own company's demerger from British Telecom BT.L , more than 1.6 times the number of shares it had in issue had been traded on the London Stock Exchange, despite little substantive change in the shareholder registrar, adding: "It's right to question whether institutions that engage in stock lending to hedge funds are behaving in a prudent or responsible way, given that such lending may work against their own interest and that of those whose money they manage."

David Prosser, Chairman of insurer Legal and General, recently even suggested putting a tax on short-sellers. "Hedge funds have crept up on us and the authorities don't have much leverage over them. They operate in a fairly opaque way and some of them operate from tax havens." Horrors! They must obviously be suppressed immediately before ancient British institutions are threatened by their dire machinations.

The FSA responded last week in a letter signed by Michael Foot, FSA managing director for deposit takers and markets, who said the watchdog "has found no clear evidence of an upturn in short selling in recent months." Ms Burns says that the FSA was keeping an eye on stock lending, using information from Crest, Britain's share settlement company which calculates the value of shares which have been lent out.

The FT at least had the grace to say yesterday that some parts of the hedge fund industry believe it has been made a scapegoat for the recent stock market slide.

It quotes Harvey McGrath, chairman of Man Group, the world's largest independent manager of hedge funds, as saying that the industry only accounted for about $600bn of assets - just 2 per cent of the worldwide stock market. Of those assets, only 1 per cent belonged to funds dedicated to short-selling, with most hedge funds having a market neutral or long bias.

"This would suggest they are having a limited impact," he said. Mr McGrath suggested recent stock market weakness reflected an unwinding of the "hype valuations" of the late 1990s.

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