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Hedge Shorting Success Grist For Uptick Rule

Date: Wednesday, March 11, 2009
Author: HFN Daily Report

Shorting the finance sector has bolstered hedge fund performance, and that in turn has lent to the push in America for the reinstatement of the uptick rule cited by U.S. Rep. Barney Frank today.

So far in 2009, the HFN Short Bias Average is up 3.32%. In February, the index returned 3.16%. That bested the HFN Hedge Fund Aggregate Average, up 0.07% for the year.

"The majority of [hedge fund gain] this year has been driven by shorting, especially in the finance sector," said Charles Gradante, managing principal of Hennessee Group, a hedge fund consultant in New York.

That success is galling for the devastated finance sector, and Frank (D-Mass.), said he is "hopeful" that the SEC will reinstate the uptick rule, a discontinued guideline forbidding the shorting of a stock while its price is in decline.

In the U.S., the uptick rule, eliminated in 2007, has come to be held up as a silver bullet for protecting banking from shorting. Jim Cramer, host of Mad Money as well as Federal Reserve Bank Chairman Ben Bernanke have called for its reinstatement.

Frank, chair of the House Financial Service Committee in Washington, D.C., said he believed the rule could be put back into effect in a month.

Concern about regulating hedge-fund short selling is not limited to the United States. In the United Kingdom in particular, where a ban on shorting the finance sector ended in September, the success of hedge-fund short selling is proving to be a lodestar.

London-headquartered Lansdowne Partners, an $11 billion hedge fund part-owned by Wall Street firm Morgan Stanley, revealed yesterday it made $18 million from a short position in Aviva, a sum that could go up should the troubled insurer continue its slide. A week ago, Lansdowne said it had shorted investment bank Barclays. The hedge fund has also profited from shorting Old Mutual and Legal & General, raking in $3.5 million, and said it is shorting financial service conglomerate Prudential.

Lansdowne referred HedgeFund.net to spokesman Andrew Honnor at Tulchan Group, who said the hedge fund did not discuss its portfolio.

From America, Paulson & Co. made $67 million in less than a half-hour shorting Lloyds Banking Group, not to mention $390 million off a short stake in Royal Bank of Scotland. Eton Park Capital Management, based in New York, hauled in $225 million with a bet against HSBC, the largest investment bank in Europe. The continuing fall of HSBC prompted a Hong Kong stock commentator to weep on live television Monday. Agnes Wu blamed short selling for lowering the price of HSBC to $4.23 a share.

"It is a heart-wrecking fall," Wu sobbed on air.

A day later, Harbinger Capital Partners revealed its short stake in HSBC.

Elsewhere in the asset class, Diamondback Capital, Gilder Gagon Howe and Odey Asset Management have also profited from shorting the finance sector.

In Australia, rumor of an old-fashioned bear raid about to grip the finance sector prompted the country to lengthen its short-selling ban.

Hedge-fund short selling has been blamed for the collapse of Bear Stearns. David Einhorn, head of hedge fund Greenlight Capital, was a vocal short seller of Lehman Bros. As the Wall Street firm fell to its eventual demise, company boss Dick Fuld blamed hedge-fund shorting. That fall, the SEC short-selling ban went into effect.

Midday trading surged after Frank commented on the expected reinstatement of the uptick rule.