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Adviser Fund Index

The FSA’s decision to temporarily ban the short-selling of certain stocks caught the City by surprise. The ban, imposed with immediate effect from September 18, prohibits the “active creation or increase of net short positions” in over 30 quoted financial companies until January 16, 2009. Investors are also required to disclose positions greater than 0.25 per cent of the ordinary share capital of the affected firms.

Hedge funds reacted to the restrictions with dismay. The Alternative Investment Management Association said it “regrets that the latest rules banning short-selling were implemented without notice or consultation”. It also questioned the effectiveness of the measures and warned that the rules have the potential to create “unfortunate consequences”, including an increase in the cost of capital for banks.

However, the regulations have met with broader support elsewhere. Even the Archbishop of York, John Sentamu, joined the attack on short-sellers, labelling them as “bank robbers and asset strippers”.

Tim Cockerill, head of research at Rowan and an Adviser Fund Index panellist, takes a more measured view but concedes that greater regulation is necessary, following the collapse of the HBOS share price and its proposed acquisition by Lloyds TSB. He says: “If I ask myself what is investment about, my answer is that it is about finding businesses with a good future. Hedge funds find the weakest animal out there and then move on to short the next one. It is not in the interests of the economy as a whole.

“There is the view that the markets allocate capital efficiently but when it gets to the point where a small number of people can destabilise a bank through shorting, it is a fairly lousy system.”

Cockerill says he expects control over shorting to become a permanent feature of markets and that the FSA may need to consider extending the ban to other sectors.

Overall, he says the regulations are likely to have “no great impact” on Rowan. The firm runs a paper alternatives portfolio which invests in funds of hedge funds but it has only a limited exposure to products which use shorting as a central strategy.

These include BlackRock UK absolute alpha – the most popular fund in the AFI. Fund manager Mark Lyttleton says the rules are unlikely to significantly restrict the portfolio. He says: “It would be better not to have a ban at all but I would not want to say I am not supportive of the FSA or the spirit of what it is doing. A short-term ban has an impact but there are plenty of other things to do.”

Less than 3 per cent of the fund is invested in short financials positions, of which one may have to be disclosed, says Lyttleton.


Playing by the rules

I was pleased to be reminded of a set of rules that are all to easy to forget when markets prove as tricky as they have been. Originally laid down by Merrill Lynch’s Bob Farrell and styled as Ten Market Rules to Remember, they were designed as a guide to wise investing. Recently, the economics team at Merrill revisited these rules with the intention of applying them to current market circumstances.

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