The ban on short selling of bank stocks looks likely to have little effect on funds listed by panellists, despite BlackRock Absolute Return fund being among the most popular selections.
The ban, imposed by the Financial Services Authority (FSA) with immediate effect on September 18, prohibits the “active creation or increase of net short positions” in several quoted financials companies until early next year. In addition, investors are required to disclose positions greater than 0.25% of the ordinary share capital of the affected firms.
Hedge funds reacted to the restrictions with dismay. The Alternative Investment Management Association said it “regrets that the latest rules banning short selling were implemented without notice or consultation.” It also questioned the effectiveness of the measures and warned that the rules have the potential to create “several unfortunate consequences”, including an increase in the cost of capital for banks and incorrect pricing of index products.
However, the regulations met with broader support outside the hedge fund industry. Even the Archbishop of York, John Sentamu, joined the attack on short sellers last week, labelling them “bank robbers and asset strippers”.
Tim Cockerill, the head of research at Rowan and an Adviser Fund Index (AFI) panellist, takes a more measured view but concedes greater regulation is necessary following the collapse of the HBOS share price and its subsequent proposed acquisition by Lloyds TSB.
“If I ask myself ‘What is investment about?’, my answer is that it is about finding businesses with a good future,” says Cockerill. “Hedge funds find the weakest animal out there and then move on to short the next one – it is not in the interests of the economy as a whole.
“There is the view that the markets allocate capital efficiently. But when it gets to the point where a small number of people can destabilise a bank through shorting it is a lousy system. What we need now is stability.”
Cockerill says he expects control over shorting to become a permanent feature of the markets, and adds that the FSA may also need to consider extending the ban to other sectors or limiting the proportion of a company’s shares that can be lent.
Overall, he says, the regulations are likely to have “no great impact” on Rowan’s clients. The firm runs a paper “alternatives” portfolio, which invests in funds of hedge funds, but it has only a limited exposure to products that use shorting as a central strategy.
These include BlackRock UK Absolute Alpha – the most popular fund in the AFI. Mark Lyttleton, its manager, says the new rules are unlikely to restrict the portfolio significantly. “Of course, it would be better not to have a ban at all, but I would not want to say that I am not supportive of the FSA or the spirit of what it is doing,” says Lyttleton. “A short-term ban has an impact, but there are plenty of other things to do. We won’t scream and shout about this.”
Less than 3% of the fund is invested in short financials positions, of which one may have to be disclosed, he adds.
Sam Sibley, an investment adviser at Beckett Asset Management, does not have exposure to UK Absolute Alpha. However, she has looked at the likely impact of the new rules on Standard Life’s Global Absolute Return Strategies fund, which was opened to retail investors earlier this year. The portfolio uses a range of techniques to generate returns of 5% above the six-month sterling London interbank offered rate. Sibley says the fund is unlikely to be affected, because it shorts indices rather than individual stocks.
The FSA’s measures will remain in place until January 16, 2009, although there will be an interim review after 30 days. However, the market’s immediate concern is whether the authority will further extend its list of banned stocks.
Resolution, which featured on the original list of 29 firms, was removed after the FSA discovered its shares were delisted in May. The authority also added several groups, including Schroders and Investec, thereby increasing the number of stocks to 34.
Other firms – including Man Group, a hedge fund manager – are understood to be eager to be covered by the new rules. Reita, the campaign for real estate investment trusts, also suggested its members should be added to the list. In a survey by Reita in August, 60% of respondents said that shorting was responsible for increased volatility in the property sector. Property investment trusts were trading on an average discount of 39% last week, according to Trustnet.
The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 18 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see www.fundstrategy.co.uk/adviser_fund_index.html).