ASIC & Short Selling | Hedge Fund Discussion Notes


ASIC & Short Selling

The Australian Financial Review reported today that ASIC is concerned that hedge funds might be colluding to drive down share prices to profit from short selling. The concern appears to be around knowledge of potential margin calls.

In particular, there appears to be a concern that share price falls can be exaggerated if it results in margin calls that in turn results in further sales of stock. How much stock is called will depend on the fall in price and the extent of cover held by investors with investments on a margin basis. While share prices are evident to the market, the latter is not. There appears room to increase transparency in this area. I am not aware of any markets in the world where the extent of margin lending against a company is published. However, a good start would be to require that the margin loans and changes of margin loans of related parties in the company be made public along with declaration of holding.

ASIC Chairman Tony D'Aloisio acknowledged the important role that hedge funds play in providing liquidity to markets, however the author of the article Matthew Drummond shows his distrust of short selling by using the term "punting" when explaining the use of short selling by hedge funds and refers to this as "the ability of hedge funds to manipulate the market in this way".

By implication, investing is good and short selling is bad. This is nonsense of course. The real strength of hedge funds is that they are able to invest in companies they consider have good prospects and sell companies they believe have poor prospects thus helping to drive share prices towards fair value.

Yes collusion, if it occurs, is bad and transparency of information is good. But lets not colour short selling with an "evil" tag. That's a mistake.

By Rick Steele

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