Short selling, the origins of the current financial crisis, and the role of hedge funds were all on the menu at the Alternative Investment Management Association’s luncheon at the Toronto Hilton on Tuesday.
An expert panel consisting of David Picton, president of Picton Mahoney Asset Management, Eric Sprott, CEO of Sprott Asset Management, and Peter Puccetti, chief investment officer of Goodwood Inc., discussed a number of topics, including the recent ban on short selling in both Canada and the U.S.
“I think this is a seriously misguided policy,” said Picton, arguing that the real problem lies not with the practice of shorting stocks, but with naked short selling. Sprott agreed the ban is problematic, and pointed to recent market activity where stocks shot up after the announcement on the shorting ban, but plummeted the next trading day. “I think the proof is in the pudding that the shorting has nothing to do with it,” he said.
The panelists argued that current disclosure rules for hedge funds are sufficient, and brushed off suggestions that accounting standards played a significant role in the global crisis.
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“It seems to me it was more of a regulation issue than an accounting issue,” said Puccetti. “But we can all be sure of one thing. Coming out of this, regulation is going to be tighter and the pendulum will probably swing to the other extreme.”
“It’s not an accounting problem,” added Sprott. “It’s an issue involving highly leveraged institutions trying to de-lever and get toxic assets off their books.” He said the credit rating agencies share much of the blame for the mess by allowing the investment banks to “lever up” to the point of 40:1.
When asked if now is the time to adjust their investment strategies, the panel rejected the idea unanimously. Sprott described the past week’s wild fluctuations in terms of market gains and losses, and said changing strategies would only complicate matters.
Asked how to handle a client who expected their hedge fund to “hedge,” Puccetti explained that his firm is very clear from the outset about risk, while Sprott argued that hedge funds do provide some protection in a bear market, but investors need to understand that not all funds are equal.
Each panelist acknowledged a slowdown in the hedge fund market, but denied that it’s a cause for worry. Sprott identified two ways to bring the market back up. “Either people calm down, or you can rise above the performance of others by putting some positive reforms on the table.”
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