VIEWPOINT STOCK LENDING/SHORT SELLING
SUMMARY
Fans of shorting argue that
it can help to reduce overall
risk as it gives fund managers
and other investors a tool with
which to reduce their exposure
to shares they expect to
perform poorly to below 0%.
Fund managers that use the
skill need to spend a great
deal of time watching share
price movements, which could
mean they have less time for
qualitative research.
Short selling is now widely
accessible to retail investors
through absolute return funds
and some ETFs.
“
I do not
believe shorting
is destabilising in
the normal course
of things. In fact,
in normal market
conditions it can help
to prevent the value
of a stock running
too high and creating
a bubble effect
”
Bill Maldonado, head of
alternatives at HSBC Global
Asset Management
BY JESS BOWN
Prior to the credit crunch,
only experienced retail
investors had heard of short
selling, or shorting, shares.
But the practice hit the
headlines in 2008 when the
dramatic 70% drop in the
value of HBOS shares was
blamed on the short selling
of the bank’s stock.
The FSA stepped in to
prevent runs on the shares
of other beleaguered financial
institutions, introducing
a ban on the shorting
of shares in about 30
leading financial stocks.
And short selling quickly
became known as one of
the causes of the credit
crunch and ensuing financial
crisis.
The ban on short selling
financial shares was
lifted on 16 Jan, 2009.
But the FSA continues to
require any short positions
worth more than 0.25%
of the total stock market
value of a company to
be disclosed.
Sally Dewar, a managing
director at the FSA, said
at the time: “Continuing
the disclosure obligations
as we propose will reduce
the potential for abusive
behaviour and disorderly
markets.”
l As bad as all that?
But does short selling actually
deserve its reputation
as a potentially dangerous
practice?
Formerly the preserve
of hedge fund managers, it
is now also used by managers
of so-called absolute
return funds, which aim to
beat cash returns whatever
the market conditions, as
well as some private investors
keen to profit from
companies they believe are
overvalued.
Fans of shorting argue
that, used properly, it can
help to reduce overall risk
as it gives fund managers
and other investors a tool
with which to reduce their
exposure to shares they
expect to perform poorly
to below 0%.
There is also a school
of thought that views
short selling as a stabilising
force in normal market
conditions.
Bill Maldonado, head of
alternatives at HSBC Global
Asset Management, says: “I
do not believe shorting is
destabilising in the normal
course of things. In fact, in
normal market conditions
it can help to prevent the
value of a stock running
too high and creating a
bubble effect.”
l Catch my fall
Some market watchers are
even concerned that the
38% fall in the short selling
of global equities over
the past year may prove
problematic as shorting
can help to prevent share
prices falling too far when
market conditions worsen.
“With so few shorts to
cover, markets could drop
if worldwide economic conditions
deteriorate,” says
Will Duff Gordon, senior
analyst at Data Explorers.
“Short selling can act as
a brake on falling prices,
since people have to cover
their shorts by buying back
the shares.”
Short selling is definitely
not for everyone, though.
Fund managers that use
the skill need to have a
Given short s
Stock lending and short selling were a hu
peak of the banking crisis but are these p
with suspicion today or are they actually
benefits for UK investors?
healthy appetite for risk,
much investment experience
and a great deal of
time to spend watching
share price movements for
it to prove profitable.
Darius McDermott, managing
director of Chelsea
Financial Services, says:
“Short selling requires a
huge amount of time and
knowledge and is not suitable
for mainstream investors.
I did it for about
two weeks, but I stopped
because I found it too
demanding on my time
– not to mention frightening.
You need to be watching
your investments all
the time and it was taking
over my life.”
You also require significant
funds under management
to short sell success-
fully, as you must have the
necessary balance to cover
any share price rise that
takes place while you are
waiting for it to fall.
What’s more, short selling
is only possible if you
can find a shareholder who
is prepared to lend out
shares, which they generally
do for a fee. And
it is always a risk that
the lender will recall their
stock, potentially forcing
you to buy it at a loss.
l Down with charges
The practice of stock lending
is popular with exchangetraded
fund (ETF) managers
as it enables them to keep
investor charges down.
Mike Parsons, retail sales
team head at JPMorgan
28 PORTFOLIO ADVISER [www.portfolio-adviser.com] MAY 2010
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