European hedge funds struggle as short-selling bans disrupt strategies
27/03/2020 14:58
* Bankers say hedge funds unwound shorts due to ban
* Several M&A transactions hit by bans - sources
* Lansdowne, Man, Legg Mason, Farringdon down in March -
data
By Maiya Keidan and Clara Denina
LONDON, March 27 (Reuters) - European hedge funds struggled
to navigate the coronavirus-induced extreme market volatility
during March, with many down by double-digits in the space of a
few weeks as short-selling bans hampered their strategies.
Regulators in France, Italy, Belgium and Spain ordered
temporary short-selling bans to stop investors betting on a fall
in the share price of companies ranging from Spanish bank
Santander SAN.MC to Air France-KLM AIRF.PA and Italian
automaker Fiat Chrysler FCHA.MI .
Short-selling is a strategy often used by so-called
'event-driven' or 'merger-arbitrage' hedge funds that bet on
takeover or merger deals, reducing their risk by shorting, or
selling, the acquirer and buying the target company.
But sources said the short-selling bans prevented such funds
deploying their strategies against a number of companies,
including French payment firm Worldline's WLN.PA planned
acquisition of peer Ingenico INGC.PA , Alstom SA's ALSO.PA
purchase of Bombardier's BBDb.TO rail division and Ray-Ban
maker EssilorLuxottica's ESLX.PA bid for Dutch opticians group
GrandVision GVNV.AS .
"Short-selling bans amplified market movements in recent
days and hit several long-short equity and event-driven
strategies," Philippe Ferreira, Senior Cross Asset Strategist at
Lyxor Asset Management told Reuters.
So-called long-short funds struggled. Legg Mason's 147
million euro ($161.92 million) European fund lost 16.3% in the
month to March 25 and was down 20% year to date, while
Lansdowne’s European Absolute Opportunities Fund lost 14.8% in
the year to March 20 and its Princay Fund was down 46.4% over
the same period, according to data compiled by HSBC.
Britain's Man Group lost 6% in its $354 million Enhanced
European long-short offshore hedge fund, run by Neil Mason and
Ikitsa Anastasov, in the month through March 20 and 5.3% over
the 12 months to the same date, the HSBC data showed.
All of the funds declined to comment.
UNWINDING
Jack Inglis, CEO of hedge fund trade body AIMA, told Reuters
that one of the main reasons pension funds, insurance companies
and endowments choose to invest in hedge funds is for their
ability to mitigate risk in periods of market turmoil.
"In the current volatile market, short selling is, above
all, a critical risk mitigation tool which enables hedge fund
managers to protect their clients’ money," he said.
While short-selling bans only legally prevent investors
taking new positions, bankers told Reuters many hedge funds feel
forced to unwind existing short bets because they can no longer
manage one side of their position.
"The virus is something but then...you have the oil
price...and then on top of that, you had the short-selling ban,"
said one banker who works with hedge funds. "The three things
combined destroyed anything in the event-driven space."
"I have done September 11, the financial crisis but I have
never seen a case like this where everything implodes together
at the same time within a week with no liquidity."
Hedge fund platform Millennium Management, which has four to
five merger-arbitrage teams, according to a source close to the
firm, was down 4.3% in the year through March 20. urn:newsml:reuters.com:*:nL1N2BH01R
Regulatory filings show Millennium had short positions in
several companies covered by the bans, including French car part
company Faurecia EPED.PA , which is being spun off by Peugeot
PEUP.PA as part of the automaker's tie-up with Italy's Fiat
Chrysler.
However, Lyxor's Ferreira said several strategies had
started to recover this week.
Farringdon Capital Management's $160 million Alpha One fund
was down 16.2% in the month to March 24, according to HSBC's
data, but a spokesman told Reuters it was only down 12.6% for
the month to March 26.
Man Group's Enhanced European long-short fund had also
recovered slightly to a negative performance of 3.7% in the
month to March 25, according to a source close to the firm.
($1 = 0.9079 euros)
(Reporting by Maiya Keidan and Clara Denina, additional
reporting by Saikat Chatterjee; Editing by Kirsten Donovan)
((Maiya.Keidan@thomsonreuters.com; 44 207 542 1594; Reuters
Messaging: maiya.keidan.thomsonreuters.com@reuters.net))