IO: Do you want to tell me a little bit about what’s going on overseas? There has been similar moves to what’s happened here over the weekend in the States in terms of restricting short selling. Can you tell me a little bit about how that will affect your business?
SM: Certainly, for both the US and the UK markets which is where the majority of the managers that we invest with have their operations based, both of the regulators in those markets have banned short selling on financial stocks only, the impact on our portfolios we think will be relatively muted because we don’t have any financial specialist managers and in addition our managers ... we don’t have any dedicated short selling managers who would obviously be impacted by this, the majority of our managers have diversified portfolios of which financials would be a certain proportion, a relatively small proportion and luckily for us they’re also generally net along the market so they tend to benefit when the market is going up. So, there’s a rally caused by these new regulations, on the face of it that would help our performance.
IO: Which hedge funds are you expecting to be more affected than yourselves? Are there any in particular that you think are going to suffer from this move?
SM: Yep, just to be clear we’re a fund of hedge funds ... So there are fund of hedge fund strategies that I would expect to be worst impacted by these moves, ah dedicated short sellers, their whole bread and butter is shorting and doing nothing else. Obviously if part of your market is financial stocks are excised from the ability to be short sold then that has an immediate and large impact on your entire strategy. I would also expect that certain types of long-short equity managers, particularly the quantitative long-short equity managers would have difficulty with these new regulations quite often a quantitative long-short equity manager for every $100 of equity they receive from investors may invest $400 on the long side and $400 on the short side, these quantitative equity managers often take great care through the algorithms and risk monitoring to have matching longs and shorts, so for example if they’ve got a long Canadian bank they’ll also have a short Canadian bank dollar for dollar or beta adjusted. If one leg of that trade can no longer be executed that would obviously have a very detrimental effect on their strategy. I would also suspect that a lot of the trading that was traditionally done on the short side of the equities may move across to the credit default swap market, the CDS market, which as of now from what I’ve seen from the regulators, there’s been no moves to be able to stop shorting the credit of a company. Whilst they may have moved to stop the shorting of the equity of the company, you can still short the credit through the CDS market.
IO: Do you think that these restrictions are likely to stay in place permanently in the US and Europe?
SM: I doubt it. The reason being I think the regulator actually do want a short selling market, I believe that they do believe that it’s a useful market under normal circumstances, it helps with price discovery, it actually helps keep the lid on upward speculation when stocks are running away on the upside you actually need short sellers to put a bit of sanity in to the market, however we’re obviously facing extraordinary times in the market at the moment and the risks of major institutions or banks going under because of market speculation is greater than the intellectual purity of market economics.
IO: There’s a lot of argument that these sorts of restrictions will remove much needed liquidity from the market. What’s your position on that?
SM: From what I’ve been seeing there has been plenty of liquidity in the market. For any stock that’s still a viable company there seems to be spikes of liquidity that a company’s volatility, so I don’t think liquidity is a real issues at the moment. Getting out a price that you think is legitimate may be a problem, but I think there’s plenty of trading going on so I don’t think that the absence of short sellers will have a great impact there.
EBI Price at posting:
$1.56 Sentiment: LT Buy Disclosure: Not Held
