Hedge funds are searching for ways around the bans on short selling, even as the restrictions introduced last week in the US and UK spread to new countries. Managers said they would continue to place bets on their negative views on the banking sector, even as straightforward short sales were no longer possible. However, they face active regulators who are moving to close loopholes in the hurried rules, designed to calm markets by preventing investors from betting on a worsening of the financial crisis. The UK’s FSA watchdog body issued new guidelines to make clear that shorting an index and buying back all but one of the underlying stocks – in effect creating a short position on the one missing company – was forbidden. In the US, the SEC said marketmakers  – who ease trading – would not be exempt from the rules if they knew a customer was increasing a net short position. But the SEC has no powers to regulate OTC derivatives such as swaps, which can easily be structured to short a company. Managers and hedge fund investors said traders would be able to use alternatives, although they might not be as good as a straightforward short.

This entry was posted by Gwen Robinson on Tuesday, September 23rd, 2008 at 5:36 and is filed under Capital markets, Hedge funds. Edit this entry.