Rob Swystun, Pristine Advisers
The New York Stock Exchange wants to know what stocks hedge funds are shorting and they want those funds to be compelled by law to reveal them.
Over in the European Union, hedge funds are already obligated to reveal which stocks they are betting will fall and the NYSE wants the United States to follow suit. As mentioned in a Bloomberg article by Annie Massa, the EU makes hedge funds publish short positions once they reach 0.5% of a company’s share capital.
The NYSE wants the US Securities and Exchange Commission to implement similar rules State-side, as evidenced in a letter dated Oct. 7, where the NYSE calls for the SEC to “bring light to a less transparent and increasingly consequential corner of the securities market.”
The thinking is that large hedge funds have an unfair advantage because they can pay their brokers to compile up-to-date short-selling data while everyone else has no choice but to wait for up to two weeks for stock exchanges to publish an official tally of the amount of a company’s stock that is out on loan. While the SEC forces hedge funds to periodically publish their long positions, no such rule exists for short positions.
Across the pond, hedge funds have been forced to report short positions of as little as 0.2% to their respective national regulators since 2012. When those positions reach 0.5%, the funds must tell everyone. This rule was implemented in response to the last financial crisis.
Not surprisingly, hedge fund managers themselves are not in favor of implementing this sort of disclosure rule, as it could lead to copycat investing.
“Being a fund manager and an investor, you don’t want to give away all of that information so readily, because that’s what makes your investment fund unique,” David Tawil, a founder of Maglan Capital, an $80 million hedge fund in New York, said. “If everyone knows what my positions are, then they can go ahead and essentially mimic them.”
Hedge funds with greater than $100 million in assets are required to report those holdings to the SEC within 45 days after each calendar quarter ends. In the aforementioned letter from the NYSE, which was written in conjunction with the National Investor Relations Institute, the organizations say “it is past time for the Commission to require short-position reporting at least to the same extent of long-position reporting.”
In a different letter from NYSE President Tom Farley to customers that outlined the NYSE’s proposal to the SEC, he said the Listed Company Advisory Board has discussed the lack of transparency on short positions.
“There was a clear consensus among that group that more transparency would be helpful,” Farley said in his letter.
The advisory board is a committee of firms listed on the NYSE.
The CEO of the National Investor Relations Institute, Jim Cudahy, put in his own two cents in an emailed statement to Bloomberg, saying that long positions should be reported in a more timely and frequent manner and “those investors with short positions in a security should answer to the same standard.”
The proportion of a company’s shares that are out on loan (the short interest) is a good predictor of returns, Massa says. Short interest in stocks of S&P 500 companies has increased since the summer. About 3% of the equity benchmark’s shares were outstanding as of October 20, which was near the highest level since June 2012, according to Markit data. The average short interest over the last year is 2.1%.
Do you think hedge funds should be obligated to reveal their short positions?