(March 2, 2012) — Increased disclosure on short positions has meant actions by large, well-regarded hedge funds have become frequently imitated by smaller ones and has potentially impacted performance, research has found.
In the wake of the financial crisis, several European regulators brought in rules on short-selling disclosure that compelled investors taking these positions over a certain level to inform the market. Research by Dr. Adam Reed from the Kenan-Flagler Business School University of North Carolina showed the announcement of a short position by a large, successful hedge fund significantly increased the likelihood of similar actions from smaller funds.
Reed was talking in advance of his session at a conference hosted by market monitor Data Explorers later this month.
Reed said: “One disclosure is often followed by another – there is evidence of follow on activity.”
The research was carried out mainly looking at short-selling activity and subsequent disclosures that were made when a company announced it was selling more stock through a rights issue. Reed said: “We looked at which funds had the most impact on share prices and follow-on activity and the characteristics of these funds. The largest hedge funds are the most likely to be followed and the better the reputation, the more people follow them.”
Reed and his team looked at about 700 disclosures made across the United Kingdom, France and Spain, which had all implemented similar rules.
“We also looked at the geography of the initial disclosures and the subsequent ones and found they were similar,” Reed said.
This finding led the team to consider whether there had been information sharing. The essence of hedge fund investing is to exploit inefficiencies and unnoticed quirks in the market. Last year the average hedge fund produced poor performance. According to Hedge Fund Research, the average return in the sector was a negative 4.8% in 2011, against the S&P 500 that closed the year relatively flat.
“Some larger funds are concerned that their information is being shared with more people than they would like,” Reed said.
Data from HedgeFund.net showed the index tracking short bias hedge funds lost 19.54% over the 24 months to the end of January and was the worst performing in its roster.