Should the SEC Force Hedge Funds to Disclose Short Positions?

The SEC is looking to force hedge funds to disclose their short-sale positions, and further plans to subpoena hedge fund records (see Bloomberg article). Why stop there?

Why not just make it more difficult to even short a stock? Oh, never mind (see Reuters article). I suspect that if as much attention was paid to making sure that companies were not leveraging over 50-1 as is being given to finding coordinated short selling (which may be impossible to prove BTW, even with disclosure), that short-sellers might be getting their hat handed to them in a more natural way.

By the way, if you know that a famous and successful short seller with deep pockets is taking a short position in a certain company, are you more likely to go long or short? Could extra transparency even cause more traders to jump on the pile, making things worse? Would seeing that multiple funds are short a stock make you assume the stock is being manipulated in a coordinated manner, or would it give you more reason to think the stock had issues?

The law of unintended consequences may raise its ugly head once again.

Disclosure: None

Comments

[glassbox:]

David, you reflect the typical short seller mentality of prefering to operate in the dark. What is wrong with disclosing short positions? Do shorts have a problem with it? If longs have to disclose, then shorts should to.

Instead of blaming the companys, tell me, what is the problem with disclosing the short position. How would it jeopardise transparency and price discovery?

2008 Sep 19 03:26 AM

[lavalyn:]

glassbox: I don't blame people for wanting to hide short positions. Look at the response David Einhorn got when he announced he had an active short position against Lehman Brothers. Absolutely vilified. We may call diehard bulls "deluded" but there's no equivalent to "selling America short" for longs.

2008 Sep 19 10:26 PM

[jetski:]

It would make me think that they had inside information that they were trading on.

2008 Sep 20 11:13 AM

[Daniel Moser:]

I would like to take this time to comment that naked short selling should have never been allowed in the first place. It makes zero logical sense to me. Having said that I am quite frankly excited about the short selling disclosure requirement. There are several hedge funds that I admire that engage in short selling. I think this disclosure requirement will provide a great learning opportunity for students of finance to gain some insight and starting points for why some funds short. How could you turn down the opportunity to attempt to find out what Jim Chanos is thinking? This is a great thing if you are interested in investing.

2008 Sep 23 10:10 AM

[Sepod:]

Naked shorting is not allowed. The problem lies with enforcement. Chris Cox, SEC Chair has chosen to look the other way when it comes to Naked shorting enforcement.

2008 Sep 29 11:03 AM