Short Selling Ban Divides Companies And Investors

by Phillip Morton, Investors Offshore.com

06 October 2008

A majority of institutional investors think the US Securities and Exchange Commission, the UK Financial Services Authority and other global regulators should permit the short-selling of financial stocks, but most large companies support the ban imposed earlier last month, according to a survey conducted by Greenwich Associates.

Greenwich Associates surveyed 905 asset managers, pension funds and large companies around the world about the temporary ban on financial stock short-selling imposed by these regulatory authorities in response to turmoil in the financial sector. The survey was conducted via the internet from September 24 through September 29, 2008.

Overall, more than 60% of survey participants say the short-selling of financial stocks should be allowed, nearly a quarter say the practice should be banned, and almost 15% are uncertain. However, opinions diverge sharply between institutional investors and large companies. Only 32% of large companies think the shorting of financial stocks should be permitted, with a solid majority supporting the ban. While slightly more than 45% of pension funds say investors should be able to short financial stocks, nearly 40% support the regulators' decision.

"Less surprising is the broad level of support for short-selling among asset managers, almost two-thirds of which think the short-selling of financial service companies should be permitted, with only 24% dissenting," says Greenwich Associates consultant Steve Busby.

Support for short-selling is strongest in North America, where two thirds of survey respondents think the shorting of financial stocks should be allowed. In Europe, almost 55% of survey respondents say the practice should be permitted, as do more than 60% in Asia.

Only 26% of survey respondents say they place the blame for the current market crisis on hedge funds, the main practitioners of short-selling. While the proportion is higher among corporates at slightly more than 40%, most investors and companies see the roots of the market collapse not in the actions of short sellers, but in mistakes and excesses on the part of investment banks, mortgage underwriters and ratings agencies.

Nevertheless, the ban on financial stock short selling is likely to have a profound impact on the hedge fund industry. Hedge fund managers have been scrambling to adjust complicated trading strategies to take into account the new rules. The combination of the ban on financial stock shorting and the broad market collapse has left many hedge fund investment strategies in disarray. Managers that employ convertible arbitrage strategies are being hit hardest.

"Basic convertible arbitrage strategies entail short-selling and many of the new convertible bonds issued in the United States in the past year have come from financial service companies, whose stocks are now off limits for shorts," says Greenwich Associates Director, Hedge Funds Karan Sampson.

"This is just one example of how the sudden imposition of this ban has disrupted hedge fund investment operations," Sampson added.

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