INTERVIEW-Hedge fund standards chief fears backlash

LONDON (Reuters) - The chairman of the Hedge Fund Standards Board on Wednesday voiced fears that financial regulators could be swayed into implementing potentially harmful legislation in the wake of the credit crisis.

Antonio Borges is at the forefront of the hedge fund industry's drive to head-off increased regulation. The HFSB was set-up to develop a voluntary code of best-practice that would offer sufficient oversight of the industry.

"There is extraordinary political pressure and when that happens it's very difficult to know whether the outcome will be the best possible one or not," Borges told Reuters.

"The reputation of the industry will drive public opinion and therefore politicians in directions which might be harmful for all of us, not just hedge funds. Banning short selling is bad for the whole market," he said.

Hedge funds have come under intense scrutiny over the past few months, notably for the impact of short selling strategies which many managers employ to target stocks they think will fall in value.

In September, regulators in Europe and the U.S. imposed a temporary ban on shorting financial stocks amid fears hedge funds were exacerbating the sharp declines in bank stocks. Even sharper falls since have called that argument into question.

"Some of these more immediate reactions can be counter-productive," said Borges, formerly vice chairman and managing director at Goldman Sachs International (GS.N).

"The most important thing now is to reassure investors so people feel their investments aren't going to disappear overnight. You can't remove the instruments that give people greater security and enables them to make returns."

The HFSB on Wednesday announced it had added 10 new signatories including Blackrock Investment management UK, New Star Asset Management and Sabre Fund Management. The new additions mean the HFSB now represents about half the hedge fund assets in Europe.

(Editing by Joel Dimmock)