New short selling rules will have little impact on 130/30 managers, says S&P

Date: Thursday, October 9, 2008
Author: Hedgeweek.com

The restrictions imposed on short selling of financial stocks by regulators of markets throughout the world are not having a significant impact on managers of absolute return and 130/30 equity funds, according to a survey by Standard & Poor's Fund Services.

'In general, fund managers do not expect the restrictions to have a significant impact, either because they are already short financials or because they do not want to have significant short positions in this area,' says S&P Fund Services lead analyst Randal Goldsmith.

He points to the Invesco Pan European 130:30 Equity Fund, which is already short financials. By contrast Mark Lyttleton, manager of the S BlackRock UK Absolute Alpha Fund, says that in the current volatile environment he would prefer not to have significant short exposure on banks and he is generally long other financials. He was short banks during the third quarter, and this detracted from performance.

'Lyttleton acknowledged that if the market environment stabilised and he saw the prospect of making money from shorting bank shares, the FSA rules would limit his management of the portfolio and he sees no way around the rules,' said Goldsmith. However, he points out that the restrictions are only in place until mid-January 2009, and so will have no significant impact on his long-term management of the fund.

Tim Russell, manager of the Cazenove UK Absolute Target Fund, says that attribution analysis since the fund launched in July this year showed that the biggest negative contributors had all come from the short book, with housing related shorts costing the fund 1.1 per cent.

Russell believes that housing is one year into at least a three-year bear market, but also notes that this is a heavily-shorted sector where stock borrowing is becoming harder. The fund has stuck to its starting position of being long defensive shares, financials and consumer services but short commodity and industrial cyclicals, house builders and technology. However, the position overall is net positive due to supportive valuations.

Across Europe, each jurisdiction has implemented different requirements, either completely banning short selling in financial and related securities or requiring that all short sales are covered either by having securities in place or borrowing them. In addition, a number of regulators have issued lists of securities covered by the new requirements, which are constantly updated.

The Invesco Pan European 130/30 Equity Fund and JPMorgan's 130/30 strategy are potentially affected by restrictions in other European jurisdictions, Goldsmith says, and face a constantly changing list of stocks affected. Both funds have taken steps to ensure they are compliant with the rules across Europe.