Asian hedge fund managers are waiting with dread to see if tough new short selling restrictions sweep across the region after Australia and Taiwan joined US and UK regulators in cracking down on the practice.
Major Asian markets, such as Japan and Hong Kong, have so far held their fire. But industry executives, many angry with the recent restrictions, said the combination of market volatility and politics makes the outcome impossible to predict.
"My fundamental view is that it is utterly idiotic. In the current market environment, the priority I would have thought would be to encourage liquidity,'' said Peter Douglas, founder of Singapore-based hedge fund consultancy GFIA.
"Most regulators that I've met have been fundamentally quite sensible people, so you have to make the assumption this is driven a mixture of politics and public opinion. And that makes it very difficult to predict the course.''
In a bid to calm global market turmoil and halt the plunge in stocks of major financial firms, US regulators imposed an emergency ban on short selling, triggering similar restrictions in Britain and other Western markets.
Both Australia and Singapore joined the trend by banning or tightening rules on controversial ``naked'' short selling, in which the share is sold without being borrowed first.
But Australian regulators went further on Sunday by banning covered short selling, in which the seller is first required to first borrow the stock. The same day, Taiwanese's regulators said they would reimpose a ban on short-selling shares in 150 top companies.
Industry executives said regulators in other Asian markets may now feel pressure to follow suit, partly because of fear that big Western hedge funds and other short sellers target the few remaining markets where the practice is not banned outright.
"It really depends on the flow of capital. If there are large funds out there that still want to try to invest and enter aggressively into those markets, then yes, they'll act,'' said Simon Scott, associate director of fund ratings with Standard & Poor's in Sydney.
In the wake of the Australian decision, S&P on Monday placed the ratings of 57 funds able to use shorting on hold.
Scott said the agency was concerned about whether these funds could fulfil their mandates given that one of their investment tools had been taken away. He warned these funds could also see redemptions by investors who question their fee structure.
Hedge funds are supposed to deliver gains in both rising and falling markets, partly because of their ability to go short. This is why they typically charge performance fees of 20%. Traditional "long-only'' funds usually just charge management fees of 1-2%.
"Investors might start pulling funds because they're just getting a long-only fund and they're paying (hedge fund) management fees on it ... on the back of reduced liquidity. There might then be some business management risk,'' he said.
Given this risk, it's little surprise that hedge fund managers fear the spread of shorting restrictions. But many in the industry are optimistic the crackdown won't spread further.
One Hong Kong-based hedge fund executive, who requested anonymity because of the sensitivity of speaking on regulatory matters, said Hong Kong was at less of a risk because it already has some shorting controls in place.
Hong Kong, headquarters for many of the region's hedge fund managers, has an ``uptick'' rule, which bars short sales below the best current ask price and limits the ability of short sellers to build positions in a falling market.
The executive said Hong Kong authorities might be tempted to leave shorting rules untouched to bolster its status as a global financial centre relative to London and New York.
"The benefit to be had from keeping your door open with fair and square rules would create a tremendous long-term positive reputation for Hong Kong. Guess who's open for business when times get tough?'' he said.
Another executive working for the prime brokerage arm of a Western bank said there was a belief that regulators in Hong Kong and Singapore do not want to impose outright bans on short selling.
But he said given the global financial turmoil, nothing could be ruled out.
"I don't see Japan doing anything. I would hope not, but if it continues to get worse, I could see it happening,'' he said.
Reuters
