FSA to investigate short-selling

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UK – The Financial Services Authority (FSA) has called for greater disclosure among hedge funds ‘selling short’, amid criticism in the industry that the practice is having a detrimental effect on already-depressed markets.

The FSA’s chairman, Howard Davies, says the FSA will instigate a review into short-selling this Autumn.

The call is a something of a reversal of policy for the FSA which had previously refuted criticism of hedge fund short selling by suggesting there was no evidence to support claims it was adding to stock market woes.

Robert Talbut, chief investment officer of London-based asset management group Friends Ivory & Sime, has called for a regulatory review of the hedge fund industry because he said it is having a “destabilising influence” on stock markets.

According to Talbut, short-selling by hedge funds has pushed share prices down disproportionately. Talbut believes this is particularly true when the stock markets are in decline as there is less investment activity on the part of institutional investors.

He warns that increased short-selling by hedge funds is leading to investors selling their shares and therefore triggering further falls in the markets overall.

Talbut’s comments echo those of David Prosser, chief executive of insurance firm, Legal & General, who also recently called for a review of hedge funds.

Prosser said he would like to see a new tax imposed to make it less attractive for institutional investors to lend shares to hedge funds so they can be sold short.

But the calls have met with some opposition. Man Group, a major hedge fund player, says the industry is only worth around $600bn (€599bn) or 2% of the worldwide stock market and that it is being used as a scapegoat.

Moreover, Man claims short-selling accounts for only half of this total and that most hedge funds are market neutral or have a long bias which means their impact on stock markets is limited.

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