Short sellers will be exonerated
Chief executive of Aima in London, Florence Lombard, thinks hedge funds are being unfairly bashed for the recent stock market falls and that short selling will ultimately be exonerated.
Florence Lombard is the chief executive of the London-based Alternative Investment Management Association (Aima). During a visit to Hong Kong, she spoke to AsianInvestor.
What effect is the current state of the markets having on hedge funds?
Different levels of impact in different parts of the world, with the majority of the direct negative impact being experienced in Europe and in America, particularly as a consequence of the various short selling bans which have had a negative effect on hedge fund performance.
Here in Asia, the landscape appears to look better at this point, but when you are faced with these kinds of extreme and erratic conditions, institutional investors do need liquidity and may redeem their investments in hedge funds in order to plug holes.
What was your reaction to the shorting bans?
We understand the severity of the problems arising in the banking sector, and why 'circuit breakersÆ might have been perceived as a temporary measure. From what they were seeing, the regulators believed that short selling was partly to blame for the downward movement in shares. However, shares have continued to fall even when short selling wasnÆt available, so we know now that you cannot explain the severe drop in value as being solely attributable to shorting. Also, even in cases when shorting was allowed, the data available suggests that the number of shares available for borrowing in certain stocks, for example HBOS, canÆt account for the extent of that stockÆs price fall.
I am hopeful that shorting will be exonerated of the accusations that it was responsible for share price falls, certainly in so far as hedge funds are concerned. It is a legitimate market tactic that is used for hedging, not just by hedge funds, and regulators have been saying we need to re-establish efficient markets. Some indeed such as the SEC, have already lifted the bans. If there has been market abuse, then weÆre calling to see the evidence of that and, if necessary, for the relevant prosecutions to be made. We absolutely condemn market abuse, which should be rooted out of the system if possible, but are weary of the links being made between shorting, market abuse and hedge funds. We do not believe this to be justified.
A major prime broker has gone bankrupt, causing a lot of problems for its hedge fund clients. What lessons can be learned?
WeÆre seeing a flight to the triple-A rated bank prime brokers.
The markets still do not understand why Lehman was allowed to fail, while all of the others were bailed out. Perhaps the US regulator will provide an answer to this in the future. The consequences of Lehman failing are multiple and affect a lot of people, including retail investors.
One large fund I know in the US had two prime brokers. One of those was Lehman. That fund will have to close down, purely because it canÆt produce an NAV now or in the near future. ThatÆs a direct consequence of LehmanÆs bankruptcy. Having multiple prime brokers did not help them. The whole issue of counterparty risk management is going to be looked at again. There will probably be a lot more regulation of the banking system as well as product regulation. It is important these things are done rationally, and that everyone involved in the market is included in the discussions.
Do you foresee a reduction in the number of hedge funds in Asia, and their assets under management?
At this point it looks as if Asia may be affected less than hedge funds in Europe and the USA. Smaller managers were having problems raising assets in any case û those and the single country focused managers may suffer more. A lot of assets are likely to be withdrawn from these funds and be reallocated to the larger funds. I foresee that the funds that can perform well should continue to grow. It will continue to be hard for start-ups.
In Asia we are weighted towards long/short strategies. Do you see any change to that?
Value investors are strong here. A lot of those are holding cash and poised to come back. At least they can still hedge û unlike many in the UK right now. I believe that once the markets and the economy begins to recover, the rebound will be quicker here than elsewhere. More volatility and multi-strategy funds are coming here and I think that growth will continue.
What effect is the current state of the markets having on hedge funds?
Different levels of impact in different parts of the world, with the majority of the direct negative impact being experienced in Europe and in America, particularly as a consequence of the various short selling bans which have had a negative effect on hedge fund performance.
Here in Asia, the landscape appears to look better at this point, but when you are faced with these kinds of extreme and erratic conditions, institutional investors do need liquidity and may redeem their investments in hedge funds in order to plug holes.
What was your reaction to the shorting bans?
We understand the severity of the problems arising in the banking sector, and why 'circuit breakersÆ might have been perceived as a temporary measure. From what they were seeing, the regulators believed that short selling was partly to blame for the downward movement in shares. However, shares have continued to fall even when short selling wasnÆt available, so we know now that you cannot explain the severe drop in value as being solely attributable to shorting. Also, even in cases when shorting was allowed, the data available suggests that the number of shares available for borrowing in certain stocks, for example HBOS, canÆt account for the extent of that stockÆs price fall.
I am hopeful that shorting will be exonerated of the accusations that it was responsible for share price falls, certainly in so far as hedge funds are concerned. It is a legitimate market tactic that is used for hedging, not just by hedge funds, and regulators have been saying we need to re-establish efficient markets. Some indeed such as the SEC, have already lifted the bans. If there has been market abuse, then weÆre calling to see the evidence of that and, if necessary, for the relevant prosecutions to be made. We absolutely condemn market abuse, which should be rooted out of the system if possible, but are weary of the links being made between shorting, market abuse and hedge funds. We do not believe this to be justified.
A major prime broker has gone bankrupt, causing a lot of problems for its hedge fund clients. What lessons can be learned?
WeÆre seeing a flight to the triple-A rated bank prime brokers.
The markets still do not understand why Lehman was allowed to fail, while all of the others were bailed out. Perhaps the US regulator will provide an answer to this in the future. The consequences of Lehman failing are multiple and affect a lot of people, including retail investors.
One large fund I know in the US had two prime brokers. One of those was Lehman. That fund will have to close down, purely because it canÆt produce an NAV now or in the near future. ThatÆs a direct consequence of LehmanÆs bankruptcy. Having multiple prime brokers did not help them. The whole issue of counterparty risk management is going to be looked at again. There will probably be a lot more regulation of the banking system as well as product regulation. It is important these things are done rationally, and that everyone involved in the market is included in the discussions.
Do you foresee a reduction in the number of hedge funds in Asia, and their assets under management?
At this point it looks as if Asia may be affected less than hedge funds in Europe and the USA. Smaller managers were having problems raising assets in any case û those and the single country focused managers may suffer more. A lot of assets are likely to be withdrawn from these funds and be reallocated to the larger funds. I foresee that the funds that can perform well should continue to grow. It will continue to be hard for start-ups.
In Asia we are weighted towards long/short strategies. Do you see any change to that?
Value investors are strong here. A lot of those are holding cash and poised to come back. At least they can still hedge û unlike many in the UK right now. I believe that once the markets and the economy begins to recover, the rebound will be quicker here than elsewhere. More volatility and multi-strategy funds are coming here and I think that growth will continue.
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