Thursday, September 18, 2008

SEC To Require Hedge Funds to Disclose Short Positions

There is news going 'round that hedge funds may be required to disclose their short positions on a daily basis. While this may comfort those who blame short sellers for all that is wrong with the universe, there are a few problems with this idea.

The disclosure of short positions would make it incredibly easy for hedge funds to score huge gains because it could literally cause panic in stocks. Let's say SAC Capital discloses that they're short Legg Mason (LM). The stock would collapse because people will freak out. Investors tend to automatically assume guys that run hedge funds are geniuses and they'll dump associated names immediately. This would certainly increase volatility in the marketplace.

Secondly, many investors use highly complex strategies that can include multiple asset classes on the same underlying stock. A short stock position may be a hedge on some other position, so the disclosure that a hedge fund is short a stock may not be all that helpful.