Fear and greed are amazing motivators, but fear has an immediacy that greed will never have. Fear adds the propensity to “do something” and do it quickly. But this “do something” mentality can have unintended consequences. In the SEC’s case, daily short reporting for hedge funds and institutions, if not managed correctly, can add market volatility right when it is least needed.
Listen, I am all for transparency and will be the first to shout for transparency from every rooftop. There has been a lack of transparency that built up over time and one day is not going to change this, especially when the transparency proposed could be from “fund to market” as opposed to “fund to investor”.
While the details of the proposed short-selling disclosure requirements are not yet public (I have been trying to find this out from the SEC all morning), I would ask the SEC to define their objectives and tread carefully when implementing these policies. For example, does daily disclosure mean “publishing” to the SEC daily (in a 13F-like manner) or does it mean handing a list of short sales once per month to the SEC (for non-public consumption). The consumption of shorting disclosures may create a shorting-rationale among other investors and thereby create mini-runs on company stock based on small relative changes.
If the SEC’s objective is to slow short-selling, then I would first reinstate the uptick rule. If the SEC’s objective is to end naked short-selling, then they need to make clear the large penalties, both for the broker and the asset manager, that will be imposed for failure of delivery. Secondly, they need to immediately have resources to investigate and follow-through on this claim and not “look the other way”. If the SEC wishes to limit short-selling on certain stocks, then let it create a “not to borrow” list for this is certainly cheaper than having to nationalize a company.
Obviously, we are entering a period of regulatory re-design. Transparency and the re-kindling investor trust are foundational objectives. Exceptional times call for new approaches and I have no doubt that additional disclosure requirements/timeframes on hedge funds will be added (although with a great deal of whining). However, the mantra still needs to be Walk Softly and Carry a Big Stick.
About the author:Seth Berlin is Principal at Performance Thinking & Technologies ( www.p-t-t.com ). PTT is a consulting firm that focuses on operations, technology integration, and risk management for hedge funds and investors. He can be reached at www.p-t-t.com or at info@p-t-t.com.
