Investors Divided On Short-Selling Ban

Oct 3 2008 | 12:52pm ET

A majority of institutional investors think global regulators should permit short-selling of financial stocks, but most large companies support the ban imposed earlier this month.

According to a new Greenwich Associates survey, more than 60% of the 905 asset managers, pension funds and large companies surveyed say the short-selling of financial stocks should be allowed while 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.

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, according to the survey. 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 U.S. 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.”

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