Hedge funds react with fury to German shorting ban

* Hedge funds warn of side-effects of Germany’s move
* Could push funds to short other securities as a proxy
* Funds may shift their investments to other areas

By Laurence Fletcher
LONDON, May 19 (BestGrowthStock) – Hedge funds have reacted angrily
to Germany’s controversial decision to ban some naked
short-selling and said the move could push investors to bet
against other securities instead or move to other markets.

Germany’s move aims to curb the activities of speculators —
particularly hedge funds — who are blamed by some politicians
for exacerbating the financial crisis.

But funds say they make markets more efficient and the ban
could create more problems.

“I think it’s ridiculous,” said Pedro de Noronha, managing
partner at hedge fund firm Noster Capital, which invests in
credit default swaps. “All it proves is how scary it is to have
people who are unsophisticated in … financial markets imposing
regulations on products they don’t understand.”

The move bans naked shorts in some financial stocks and
euro-denominated bonds, as well as related transactions in
credit default swaps (CDS), which attracted controversy during
Greece’s debt crisis, although funds say they accounted for a
fifth or less of activity in Greek sovereign CDS.
[ID:nLDE64I0LV]

David Stewart, chief executive of high-profile London-based
hedge fund firm Odey Asset Management, warned the move could
create, rather than remove, dislocation in financial markets.

“This could be very frightening for everyone. Once you start
interfering with the markets it leads to dislocation,” he said.
“If there’s just soundbite politics … and no real
co-ordination it’s very unsettling.”

OTHER SOLUTIONS

Stewart said hedge funds could shift their investments to
other areas, which may be one of Germany’s aims.

“People won’t invest where there isn’t transparency of
governments … If you think the government is interfering it
affects your investment case. You don’t know what’s coming
next.”

There could be other unintended side-effects.

Noster’s de Noronha said funds will start looking for
proxies, for instance in equity markets or currency markets,
when placing their bets on sovereign bonds.

“Hedge funds will have to find a solution. If they can’t
naked short sell CDS, they will short equities or buy puts on
indices. A lot of people are talking about … selling the
euro,” he said.

He added that the move could make it more expensive for fund
managers who want to hedge sovereign bond positions they hold.

“People who genuinely hedge their bond portfolios will have
to face a much wider bid-offer spread,” he said.

France has already said it is not considering following the
plans, while European Commissioner Michel Barnier has said the
German measures would be more efficient if co-ordinated at a
European level. [ID:nBRU010834]
“Uncertainty and lack of co-ordination can’t be a positive,”
said an executive at one large London-based hedge fund firm.

Stock Research Tools

(To read the Reuters Funds Blog click on
http://blogs.reuters.com/fundshub; for the Global Investing Blog
click on http://blogs.reuters.com/globalinvesting/)
(Editing by Jon Loades-Carter)

Hedge funds react with fury to German shorting ban