Bloodbath in Hedgistan Leads to Lawsuits Against Regulators

Changing the rules in the middle of the game usually leads to at least one unhappy party, and while the regulators won round one against hedge funds, the funds that are still standing are counterpunching via a lawsuit to be filed imminently:

A group of the world's biggest hedge funds are planning to sue the Financial Services Authority for millions of pounds of losses incurred as a result of the regulator's ban on short-selling last week.

Lawyers are being galvanised on behalf of a raft of hedge funds which claim the financial watchdog has illegitimately extended its powers and caused "wide-spread capital destruction." Telegraph

Unfortunately, legitimate risk management strategies have been harmed, something regulators failed to take into account before taking action:

"Short-selling is used for a raft of reasons, not just betting on stocks going down. Sure, there are some evil market manipulators, but this ban has trashed legitimate businesses from options trading, convertible funds and a range of risk management strategies."

But last week's extraordinary trading claimed many high profile victims, many of which were limping coming into the week. Prominent funds are down 50% YTD...will they survive?

The most recent figures from HSBC private bank showed that some hedge funds are nursing losses of as much as 50 per cent this year, with many funds having dropped more than 10 per cent last week alone. Insiders said some of the best-known funds, including Och-Ziff, Atticus, RAB Capital and Tosca are nursing heavy losses.

Throw historical precedents out the window, this market has broken all the old rules. It is about finding blood in the water and shooting against weak holders.

Tim Steer of New Star said: “What matters now is not what company you own but who owns that company. Valuations have gone out of the window. Now you have to look at the shareholder register and work out who’s going to be forced to sell. If it’s a long-only blue chip stock, that’s OK, if it’s owned by hedge funds, then watch out.”

Until some semblance of normality returns many people will choose to sit it out. From Mayfair to Midtown life has changed, and life on the BuySide will likely never be the same.

Hedge funds plan to sue FSA over short-selling ban
Telegraph
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