EUROPE: Hedge funds struggle as short-selling bans disrupt strategies.

As published on reuters.com, Friday 27 March, 2020.

LONDON (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 to Air France-KLM and Italian automaker Fiat Chrysler.

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 planned acquisition of peer Ingenico, Alstom SA’s purchase of Bombardier’s rail division and Ray-Ban maker EssilorLuxottica’s bid for Dutch opticians group GrandVision.

“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 (132 million pounds) 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.

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.

Regulatory filings show Millennium had short positions in several companies covered by the bans, including French car part company Faurecia, which is being spun off by Peugeot 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.

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