Hedge funds that use short-selling strategies have come under fire following the recent raid on shares in Halifax Bank of Scotland (HBOS). In a period of just 20 minutes, the price of HBOS’ shares fell by 17 percent after rumours were spread that the bank had asked the Bank of England for an emergency loan. In fact, the rumours were untrue, and the Bank of England was forced to issue a denial.
Suspecting that short-sellers had circulated the rumours as part of a so-called “trash and cash” tactic to force down the price of shares, the FSA issued an unprecedented warning to the market, stating: “We will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumours and dealing on the back of them.” The FSA has launched an inquiry into the HBOS market manipulation.
Although widely used by traders, short selling is most closely identified with hedge funds. At least one report asserted that a hedge fund had been the source of the false rumour.
Responding to these and similar allegations, the Alternative Investment Management Association (AIMA), the international hedge fund trade association, hit back, arguing that the hedge fund industry had become the target of “unwarranted criticism.”
Florence Lombard, chief executive of the AIMA, said it was “disappointing” that “hedge funds are often made the focus of media attention when any suspicions of market irregularities arise,” adding that it was “vital that the legitimate shorting of assets should not be confused with alleged market abuse by, as yet, unidentified players in the market.”
Defending “innovative” practices like short-selling, the AIMA said hedge funds should not only be recognised as funds that offer investors “downside” protection in difficult market conditions but also as “pioneers in new areas of finance which would not grow or flourish without them.”
To read the full statement from the AIMA, click here.