Hedge Funds Prepare to Reveal Short Positions

By Reuters | 28 Sep 2008 | 05:50 PM ET

Hedge-fund managers are reluctantly preparing to disclose their short positions to U.S. regulators Monday, a move set to give a rare public glimpse into their secretive trading strategies two weeks later.

For shareholders who have blamed short sellers for driving down company stocks, it will be a chance to see who is targeting their firm.

It is also an experiment by U.S. securities regulators, putting short sellers briefly on a similar footing to large investors who accumulate stocks and are required to regularly disclose their positions publicly.

Under a temporary Securities and Exchange Commission order, big money managers will have to reveal the number and value of securities sold short each day last week.

The disclosures are part of a series of measures the SEC has undertaken to crack down on market manipulation with an eye to calming markets rocked by a series of bank failures and fears the credit crisis will worsen.

But hedge funds and short sellers have cried foul and one has likened the disclosures to forcing Coca-Cola Co to reveal its secret formula to its competitors.

Short sellers fear that once their positions are revealed to the public, other investors will copy their positions or reverse engineer their proprietary trading strategies.

"Let's suppose a quant fund, another class of hedge funds has a large short position based on a computer model or algorithm, investors or traders could try to artificially squeeze the quant fund by buying what they are short," said Doug Kass, a short-seller who is founder and president of hedge fund Seabreeze Partners Management.

Short sellers, who sell borrowed stock in hopes its price will fall, have been accused of driving down stocks in major financial firms like HBOS, Lehman Brothers and Bear Stearns.

Lehman filed for bankruptcy protection earlier in September. Bear Stearns was sold to JPMorgan Chase [JPM 45.99 -2.25 (-4.66%) ] in an emergency sale brokered in March by U.S. officials.

The SEC and other regulators in the United Kingdom, Germany, Canada and Australia has imposed temporary bans on the shorting of financial stocks.

The U.K.'s Financial Services Authority has also imposed a similar disclosure rule and is requiring investors with an existing short position above 0.25 percent of a financial company's share capital to declare the size of their holding every day.

The SEC will keeps its information private for two weeks.

After that, the information will be disclose to the public on via online Edgar filing system.

The Washington D.C.-based hedge fund lobby group, the Managed Funds Association, has urged the SEC to amend the order and keep the information private.

It is unclear whether the SEC will amend the order.

However, the agency is expected to consider permanent rules requiring short interest disclosure.

The SEC is requiring money managers to file a comprehensive form that includes their short position at the beginning of the day, the number of securities sold short, the value of the securities sold short and the short position at the end of the day.

The form also requires money managers to disclose their largest intraday short position and the time of day of the largest intraday short position.

"The degree of difficulty in completing the new form is related to the degree of short trading activity of each manager and the level of sophistication the manager possesses in capturing the required information," said David Tittsworth, executive director of the Investment Adviser Association, which represents about 500 firms that collectively manage about $9 trillion in assets.

Travis Larson, vice president with Wall Street lobby group the Securities Industry and Financial Markets Association, said most firms will be ready by Monday. "Everyone recognizes it will be a lot of work between now and then," he said late on Friday.