Hedge funds 'won't target financials'

Date: Wednesday, March 11, 2009
Author: Business.smh.com.au

An independent monitor of local hedge funds has rubbished claims the funds would target domestic financial stocks if their short selling ban was lifted.

Australian Fund Monitors' chief executive Chris Gosselin hosed down concerns expressed by the Australian Securities and Investments Commission (ASIC) to extend the short selling ban on financial stocks for a third time until May 31.

The risk of damage from aggressive or predatory practices from short selling justified any loss of market efficiency or price discovery caused by extending the ban, ASIC said last Thursday.

Mr Gosselin on Wednesday said the idea that hedge funds conspired to push share prices down was a furphy, pointing to accusations that hedge funds had targeted Allco Finance, ABC Learning Centres and Babcock and Brown.

"It's absolute rubbish - the business is defunct. And it's nothing to do with the fact that the people have sold it or short sold it on the way down,'' he said.

"It's that they had too much debt, related-party transactions, poor accounting, poor corporate governance etc. It's not because hedge funds particularly sold them.''

However, Mr Gosselin said it was possible for hedge funds to target stocks, but this was more likely during a takeover, which would send the stock surging.

He said the ASIC decision to extend the short-selling ban for banks, insurers and other financial stocks puts the Australian market out of step with the rest of the world.

He said it also risks damaging the local market's reputation, by trying to protect individual sectors or stocks.

"It seems to be a bit odd that the government is saying we have this wonderfully robust banking system and we have four of the best  12 capitalised banks in the world but we still actually need a shorting ban to protect them.''

The hedge fund industry body, Alternative Investment Management Association (AIMA), noted that local financial institutions had recently rebuilt their balance sheets with new debt and equity.

"In the absence of more bad news from overseas, investors shouldn't naturally believe that Australian financial stock prices will fall precipitously once the shorting ban is lifted, AIMA Australia chairman Kim Ivey said in a statement last month.

Financial stocks had fallen further than the rest of the market during the ban, but Mr Gosselin rejects arguments that they would have slumped further had the ban been lifted.

"The reality is fair value will normally find its place as it has with Macquarie (Group).

"It has fallen significantly in spite of the ban because there are more sellers than buyers, and those sellers are long-only sellers who are ... concerned about the outlook or the Macquarie business model.''

Several exemptions to the ban mean investors can still use option derivatives, contracts for difference derivatives, and dual listings to short sell the sector.

Margin lending is still putting downwards pressure on share prices as the magnitude of the market's fall - down another 10% in January and February - catches up with conservative borrowers.

"Those who had a really conservative 20 or 30% LVR (loan to valuation ratio) against some stocks - those stocks are starting to touch margin limits now,'' Mr Gosselin said.

"That has a far more negative effect on stock prices than short selling because it's indiscriminate - short sellers want to sell at the highest price available, margin lenders just dump the stock out at whatever (price is) going at the end of the day.''