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Hedge funds not primarily to blame for financial collapse, say institutions

Date: Thursday, October 2, 2008
Author: Hedgeweek.com

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 last month, according to a survey of 905 asset managers, pension funds and large companies carried out by Greenwich Associates.

Overall, more than 60 per cent 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 per cent are uncertain.

However, opinions diverge sharply between institutional investors and large companies. Only 32 per cent of large companies think the shorting of financial stocks should be permitted, with a solid majority supporting the ban. While slightly more than 45 per cent of pension funds say investors should be able to short financial stocks, nearly 40 per cent support the ban.

'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 per cent 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, compared with 55 per cent in Europe and more than 60 per cent in Asia.

Only 26 per cent of survey respondents place the blame for the crisis on hedge funds, the main practitioners of short selling. While the proportion is higher among corporates at slightly more than 40 per cent, 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, Greenwich says. 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 US in the past year have come from financial service companies, whose stocks are now off limits for shorts,' says Greenwich Associates director of hedge funds Karan Sampson. 'This is just one example of how the sudden imposition of this ban has disrupted hedge fund investment operations.'