Shorting ban will force hedge funds to rethink strategy

London: Hedge funds will be forced to change their strategies in response to the bans on short-selling financial shares, hitting already poor returns, although the timing could prove fortuitous in the longer term.

Financials hedge fund managers, as well as the much wider long-short equity sector, are still assessing what the temporary bans will mean and whether to be predominantly long in their portfolios or else short areas outside their core expertise.

Shorting means betting on a lower price for a security in the future.

"The rules of the game have changed dramatically," said Susan Payne, chief executive of Emergent Asset Management.

"You're on hold," said Michael Zuppone, chair of law firm Paul Hastings's securities and capital markets practice. "You'll just have longs or you'll move onto another sector that's not covered by the ban but is analogous."

For an industry already on course for a loss this year - Hedge Fund Research's HFRX index shows funds are down 4.96 per cent month-to-date and 9.76 per cent so far this year - the bans are likely to hit returns further.

"September will be a very difficult month. The bans on shorting have made the situation more difficult for certain strategies," said Kris Raecke, portfolio manager at UBP.