Each business day HedgeCo.Net keeps you informed with the top hedge fund industry news, opinion and insight from around the globe. From the latest hedge fund launches, to the impact of regulation, competition, and investor activism - we track the topics and people that make a difference to you.
The Money Times – Short-sellers and hedge funds, though sometimes shadowy, are also sometimes seen as the smartest guys in the room. They did their homework and will bet their capital against the crowd. It’s not the most popular way to go, but the rewards can be quite lucrative.
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HedgeCo.net (West Palm Beach) – The SEC announced several actions protecting against short sales and make more short sale information available to the public.
”Today’s actions demonstrate the Commission’s determination to address short selling abuses while at the same time increasing public disclosure of short selling activities that affect our markets” said SEC Chairman Mary Schapiro.
First, the Commission made permanent a rule, that seeks to reduce the potential for abusive ”naked” short selling in the securities market. The new rule, Rule 204, requires broker-dealers to promptly purchase or borrow securities to deliver on a short sale. The temporary rule, approved by the SEC in the fall of 2008, was set to expire on July 31.
Second, the Commission and its staff are working together with several self-regulatory organizations (SRO) to make short sale volume and transaction data available through the SRO Web sites. This effort will result in an increase over the amount of information presently required by another temporary rule, known as Temporary 10a-3T. That rule, which will expire on August 1, applies only to certain institutional money managers and does not require public disclosure.
Apart from these measures, the Commission is continuing to actively consider proposals on a short sale price test and circuit breaker restrictions.
Third, the Commission intends to hold a public roundtable on September 30 to discuss securities lending, pre-borrowing, and possible additional short sale disclosures. The roundtable will consider, among other topics, the potential impact of a program requiring short sellers to pre-borrow their securities, possibly on a pilot basis, and adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities.
Short selling often can play an important role, the SEC said, in the market for a variety of reasons, including contributing to efficient price discovery, mitigating market bubbles, increasing market liquidity, promoting capital formation, facilitating hedging and other risk management activities, and importantly, limiting upward market manipulations. There are, however, circumstances in which short selling can be used as a tool to manipulate the market.
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Here Is The City – According to recently published data (for the United States in particular), a large majority of short sellers are market makers who are hedging their bets on the options markets. They were not affected by the ban, which means that those who were using options to take synthetic short positions continued to do so.
The others involved in short selling are mainly hedge funds. The average return over the last ten years for hedge funds that used short-sale, convertible arbitrage and long/ short strategies was 3%, 4.75% and 7% respectively. One can hardly argue that they were over-informed and that they earned abnormal returns.
West Palm Beach (HedgeCo.net) – James Chanos, Chairman of the Coalition of Private Investment Companies (CPIC), said in response to the SEC’s five proposed rules put forward to curb short-selling, "Rebuilding investor confidence should be the primary objective of any new regulatory effort and it is not clear that today’s proposals will meet that simple goal."
The SEC voted unanimously to seek public comments on all of the proposed rules intended to limit short-sales.
"Skeptics, independent research and critical analysis must continue to play a vibrant role for our markets to grow sustainably and with integrity." Chanos continued, "Short selling is integral to improving the efficiency of markets and enhancing market quality through narrower spreads, deeper liquidity, less volatility, and greater price discovery.
"In recent years, short-sellers have publicly warned the marketplace about the dangers at AIG, Lehman Brothers, and Enron, as well as sounding the alarm over the credit ratings agencies, non-bank subprime lenders, and credit insurers. Proposals to inhibit short-selling have the effect of limiting this vital market-based antidote to corporate fraud and speculative bubbles, and must be carefully weighed against the clear harm that comes from ill-conceived government intervention in basic market functions,” Chanos concluded.
CPIC is a coalition of private investment companies whose members and associates are diverse in both size and investment strategies.
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Bloomberg – Billionaire investor George Soros’s Soros Fund Management LLC was fined 489 million forint ($2.2 million) for attempting to manipulate the share price of OTP Bank Nyrt., Hungary’s largest bank, the country’s financial regulator said.
The Soros fund attempted on Oct. 9 to “send out false or misleading signals about a security’s supply and demand or its share price” and short sold OTP shares, the regulator, known as PSZAF, said in a statement late yesterday. The short selling caused the shares to drop 14 percent in the final 30 minutes of trade, the regulator said.
Short-sellers sell borrowed securities, hoping to profit by repurchasing them later at a lower price and then returning them to the owner. Budapest-based OTP is Hungary’s largest lender.
Market Rap – In 2005, Patrick Byrne, the CEO of Overstock.com and future Deep Capture investigative reporter, began a public crusade against illegal naked short selling (hedge funds and brokers creating phantom stock to manipulate stock prices down). He said, over and over, that the crime was destroying public companies and had the potential to trigger a systemic meltdown of our financial markets.
Soon after, I began to investigate a network of short sellers, journalists, and miscreants. I concluded that many of the people in this network were connected to two famous criminals – “junk bond king” Michael Milken and his associate, Ivan Boesky. I also began taking a close look at the Mafia’s involvement in naked short selling.
Seeking Alpha – The debate over short selling often pits traditional “long-only” managers against the upstart alternatives: hedge funds. But as this report in yesterday’s FT points out, the lines between “traditional” and “alternative” are blurring quickly. The Alternative Investment Management Association (AIMA) has been an ardent defender of the hedge fund industry against what it sees as unfair criticisms in the media (see relatedposts).
But now associations of “traditional” investment managers have come to the defense of short-selling. In fact, according to the FT, the Investment Company Institute (ICI) in the US, the Investment Management Association of the UK (IMA), and Australia’s Investment and Financial Services Association (IFSA) have each warned regulators against requiring short-sellers to publicly reveal their short positions.
Bloomberg – The Artradis AB2 fund, run by Singapore’s biggest hedge-fund firm, gained 4.96 percent in September, when Asian equities had their worst month in 18 years, two people with knowledge of its performance said.
The $2.2 billion hedge fund, managed by the firm’s co- founders Stephen Diggle and Richard Magides, returned 20.64 percent in the first nine months of the year, the people said, asking not to be identified because details are private. Asia’s hedge-fund average returns fell 16.2 percent this year, the region’s worst annual performance, according to Singapore-based data provider Eurekahedge.
Hedge funds such as those run by Artradis Fund Management Pte, which manages more than $4 billion, tend to outperform when markets are falling because they trade on volatility, which increases when prices decline. The 30-day volatility of the MSCI Asia-Pacific Index, a gauge of the average fluctuation of 990 stocks, has almost tripled to 55 percent, from 21 percent at the end of August.
Financial Times – Dubai yesterday joined the chorus of regulatory voices condemning the short-selling of shares as concern mounted that hedge funds shorting key Gulf companies are contributing to a dramatic drop in regional bourses.
Short selling, through which investors benefit from share price falls, is not allowed in the Gulf, but hedge funds have been shorting heavyweight regional stocks with the help of international brokerages and offshore accounts, according to local money managers. In the past three months, the MSCI Gulf index has dropped more than a fifth, which would equate to a loss of nearly $300bn (€208bn, £164bn) in total market capitalisation.
West Palm Beach (HedgeCo.Net)- Russia has held up very well over the month of June according to one of the most experienced Russian hedge fund managers, Pharos Financial Group. For the first half of 2008, the Pharos Russia Fund was up 3.8%, the Pharos Smll Cap Fund was up 6.8% and the Pharos Gas Investment Fund was up 3.3%. This compares very favorably with the MSCI Russia Index which was down 2.9% over the same period.
Trading activity throughout June was primarily driven by developments in global markets as domestic news flow was relatively light. However, Russia was very resilient through this very difficult month. The best performing stocks in June were fertilizers, metals and mining companies, which have also been the best performers over the first half of 2008.
Meanwhile, one of the most important developments in June was the final dissolution of utility holding company RAO UES. UES has been one of the most liquid stocks in Russia since it began trading in 1995, and for much of the following 10 years it was traded as the market proxy for Russia. The de-listing and final break up of UES on June 6 was the culmination of a very thorough restructuring of the entire utility sector which has seen $100B of assets split into a series of independent companies, and is one of the great underreported business stories of this decade.
"We expect financial markets to continue to be challenging throughout the summer as the credit crisis continues to wrack global markets." Pharos said, "Russia’s economy remains a beacon of stability in these turbulent times and the country is in excellent financial shape. However, global nervousness and uncertainty will cause short term volatility that will at times push fundamental valuation metrics aside. Our funds are positioned relatively defensively here, and we are focusing on investments that should outperform in this difficult environment."
Pharos Financial Group is specializing in the securities markets of Russia and the former Soviet Union. With a eleven year history through up and down markets, Pharos has a proven record of superior absolute returns with Russian Hedge Funds and Russia Hedge Fund Investing.
