May 19, 2010 / 3:34 PM / 9 years ago

Hedge funds react with fury to German shorting ban

LONDON (Reuters) - 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.

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. “Uncertainty and lack of co-ordination can’t be a positive,” said an executive at one large London-based hedge fund firm.

(To read the Reuters Funds Blog click on blogs.reuters.com/fundshub; for the Global Investing Blog click here)

Editing by Jon Loades-Carter

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