Alternative Investment Management Association Representing alternative asset managers globally
22 September 2008
South Africa, 22 September 2008: The South African investors should have no concern that the issues surrounding the banning of certain forms of short-selling in some international markets are relevant to South Africa.
“A clear distinction needs to be made between the practice of “naked” short-selling and “covered” short-selling in markets,” says Ian Hamilton, Chairman of the South African Alternative Investment Management Association.
“Short-selling is a genuine practice utilised by investment managers as a means of protecting capital against the risk of falling markets. The form that it takes in South Africa when it comes to listed investment markets is that the short sale must be covered which means that the investment manager either has to physically hold the stock or borrow the stock from a willing lender. This means that the market trades in a particular share are in line with the issued shares.
“Naked” shorting does not have this requirement and shares can be sold that have no correlation to the issued share capital. It can be a very risky practice and has lead in the past in the South African market to some spectacular “bear” squeezes. Veterans of the market will remember the Union Wine bear squeeze in the 70’s when in a matter of hours the share price started behaving like the Zimbabwean Dollar when word leaked that there was a naked short-sale in the market. Since then the JSE, local banks and stockbrokers and other market trading institutions have followed a strict ban on this type of practice.”
Hamilton remarks that, once again, regulation and self-regulation in the South African market has come to the fore of investors against a background of turmoil in international markets and over-reaction by regulators.
“There has been a total over-reaction in certain jurisdictions. The banning of naked short-sales can do a lot to stem the transactions that rely on unsubstantiated rumours, but to ban short sales completely is an assault on the options available to investment managers to protect capital. It is tantamount to shooting the messenger and deflecting attention away from the real causes of the market instability- the poor control on lending in the American mortgage market. One sincerely hopes that the South African Financial Authorities engage all participating parties before embarking on any unjustified interference in the domestic market.”
Turning to the actual hedge fund performance in South Africa, Hamilton adds that the local market has performed respectably in this period of international financial turmoil.
“The performance of a sample group of 25 leading hedge fund managers concentrating on the JSE and fixed interest markets showed on Friday that since the beginning of the month the average performance is – (minus) 1, 05% whereas indices have suffered declines of double figures over the same period.
Obviously critics of the hedge fund industry will jump on the negative performance, but then they have missed the point - hedge fund managers are not there to always provide positive performance. When bull markets run they are likely to under-perform the relevant indices. When markets decline, they should protect against the full decline.
All this we believe will strengthen the case for a robust hedge fund industry in South Africa so that better diversity can be obtained in investment portfolios.”
For further information, please contact:
Chairman, AIMA South Africa
Tel: +27 21 402 1600/ 082 379 1831
Managing Director, Investment Data Services Group B Comm. LLb, MBA, Advocate of the High Court of South Africa.
Ian is the Chief Executive Officer of the Investment Data Services, a major hedge fund administration company founded by him in 2003. He has a wealth of expertise and an extensive network in the South African investment market. Ian has also served as a Director of the South African Association of Unit Trusts (Now the Association of Collective Investments (ACI) and currently sits on the Fund Management Committee of the Institute of Retirement Fund and is a founder board member of the South African Chapter of Alternative investment Management Association (AIMA South Africa).
Director, AIMA South Africa
Tel: +27 21 4161447
Marketing, Press and Industry for AIMA SA and the Co-Head of Investec Prime Broking
Isabella Burke began her career at Morgan Stanley International in London, where she held a number of positions over a period of nine years, including new business development for Equity Financing. In 2000, she joined CSFB as Vice President, Equity Financing Sales helping grow their then nascent business. During her time in the UK she worked with industry bodies throughout Europe to help legislate both the Securities Lending and Hedge Fund industries. She is the co-head of Prime Broking at Investec, and currently serves on the board of the local chapter of AIMA, responsible for Marketing, Press and Industry.