Short biased hedge funds extend winning streak
Short-biased hedge funds had their best month since November 2007, gaining 9.02% in June, despite UK and US regulators making the practice of shorting shares more difficult.
According to data provider Lipper TASS, hedge funds that shorted shares made 11.95% in the first half of 2008 and 21.32% since July 2007. Shorting shares are carried out when traders borrow stock in a bet that the price will fall and can be repurchased at a lower price.
In comparison, last year, short-biased equities funds made 2.09% in June 2007, one of their five profitable months for last year. They ended 2007 up 4.72%, according to data provider Hedge Fund Research.
Short sellers have continued to profit despite US regulator the Securities & Exchange Commission clamping down on some shorting practices. It voted earlier this week to extend rules making hedge funds locate shares of 19 financial companies to borrow before they may take short positions in these firms. The rules, which encompassed mortgage finance firms Fannie Mae and Freddie Mac among others, were due to expire on July 29, but will now expire on August 12.
In the UK, the Financial Services Authority now compels those shorting companies undergoing rights issues to declare short positions if they exceed 0.25% of the firm's shares, a rule which was viewed by some as supportive recently of UK bank HBOS and mortgage lender Bradford & Bingley.
Financial companies shares contributed to short-biased equities funds' returns in June, as shares of such firms in the S&P 500 US equities index fell 18.66% in June, and 30.89% in 2008 to June 30. More than 20% of the shares of North America's banks that are available to be borrowed have been on loan during 2008, according to London short selling analysts Data Explorers.
Lipper TASS said some short selling hedge funds had also moved into energy stocks as crude oil's price rose to a 2008 high of $145.66 on 3 July.
Lipper TASS said: "A number of short sellers are believed to have increased their short exposure in that component of the energy (sector) on the grounds that the high price will lead to a rationing of demand and slower economic growth over the medium term."
Global financial stocks, along with homebuilders and consumer retail companies have been focal points of short sellers so far in 2008 according to Data Explorers.
However, one investor said shorting shares was more risky than going long, because an investor who is right in a long position faces potentially unlimited gains, while a correct short-seller can only double their initial outlay, if the shares' price falls to zero.
Patrick Fenal, chief executive at Swiss fund of hedge funds manager Unigestion, said: "Short-sellers' timing skills are important because most of the time stock markets should go up over the long-run.
"The sellers are not hoping the whole market necessarily goes down, they are looking for individual companies whose shares they believe will fall. They are amongst the only people who can try to anticipate something going wrong with a company."
Unigestion invests in some short-biased hedge funds, partly to mitigate the risk that other hedge fund managers in their funds of hedge funds are too highly correlated to equities markets. Many hedge fund managers claim to be able to make money regardless of which direction stockmarkets move.
Fenal said: "When you manage a fund of hedge funds where most of your clients want a low correlation in the long-run to global equities, if you suddenly find your long equity market exposure accelerating from 20% to 40% it's prudent to do something because otherwise the market's turning point will be harder on you."
-- Write to David Walker at dwalker@efinancialnews.com
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