Hedge fund community defiant despite shorting ban

By Laurence Fletcher

LONDON, Sept 24 (Reuters) - London's hedge fund managers remain in an upbeat and defiant mood, despite widespread vilification and last week's bans on one of their favourite trades -- short-selling financial stocks.

Hedge funds are blamed by regulators, politicians and bankers for accelerating collapses in the share prices of Lehman Brothers LEH.P and HBOS HBOS.L, but while worrying about the effects of the credit crisis on their portfolios, managers are also busy discussing trading strategies to profit from the chaos.

The Wolseley, an Italian-influenced 1920s car showroom in the upmarket St James's area of London is a favourite breakfast haunt of hedge fund managers and property investors. It remains full to bursting every morning.

Meanwhile, sports and luxury car dealerships in fashionable Mayfair and St James's, patronized by the hedge fund managers living and working in the area, said sales remain buoyant.

Managers are in defiant mood, despite last week's temporary shorting bans in the UK, U.S. and elsewhere.

Many feel they are being singled out for blame for profiting from falling banking stocks, when it is the banks themselves who are at fault for their risky lending practices.

"I think they've got it wrong and are using hedge funds and shorting as a scapegoat," said one large-scale fund of hedge funds manager, who declined to be named.

The fund manager said he remained optimistic about investment opportunities but thought regulators did not understand market mechanics when imposing the ban.

"They had to do something because there was so much finger-pointing in Washington at the evil short-sellers," he said.

Others took a more positive view.

".... investment professionals understand that the whole system needs to operate for them to practice long/short fund management," said Robin Bowie, chairman of hedge fund consultant Dexion Capital.

"If banning short selling as a temporary measure stops the panic it is in all our long term interests."

(Editing by Elaine Hardcastle)