Still, with key elements of the investment landscape being determined by government fiat, fundamental analysis goes out the window and implementing a long-term strategy becomes that much harder, said Horacio A. Valeiras, CIO, Nicholas-Applegate Capital Management LLC, San Diego. NACM had just begun ramping up its 130/30 and market-neutral lineup, bringing out a U.S. large-cap, a U.S. small-midcap and a global 130/30 strategy as well as one market-neutral strategy over the past year or two. According to eVestmentAlliance, Marietta, Ga., each of those strategies had between $1 million and $6 million in assets.
Some players believe pressure to buoy U.S. equity markets through the Nov. 4 presidential election could convince regulators to keep a lid on shorting until then.
A profusion of shorting restrictions around the globe has made life particularly complicated for managers of global funds. Most expect those restrictions to be rescinded soon, but with that tool now very much in the kit of global regulators, investment managers say they have to grapple with the possibility of longer-term restrictions.
Its not a brick wall yet, but it could be if regulators prove quick to slap on restrictions whenever the market swoons, said Churchill Franklin, a principal with quantitative equity manager Acadian Asset Management, Boston. Acadian managed $3.1 billion in market neutral and $2.6 billion in 130/30 as of Aug. 31.
Some see a longer-term fallout resulting from market mayhem thats been unprecedented for market players who arent centenarians.
Richard Ennis, founder of investment consultant Ennis Knupp, Chicago, said the volatility could well take the wind out of the sails of some of those investment activities that use shorting.
Investors had become credulous about anything that will produce a higher rate of return than is reasonable to expect from stocks and bonds, and this crisis may help people get their feet on the ground again, Mr. Ennis said. The result could be more interest in low-cost indexing, and more attention paid to public markets in general as opposed to negotiated investments, he said.
NACMs Mr. Valeiras said demand for 130/30 strategies, where performance over the past year or so already has been disappointing, could be further depressed by the new capital markets calculus. Expertise in shorting stocks will be ever more important for money management firms, but were probably less enthusiastic about the short-term prospects for raising money for 130/30 portfolios, he said.
Market-neutral hedge funds also have been tripped up by the flurry of shorting restrictions imposed in the U.S., Australia and elsewhere, money managers say. Australias decision to ban shorting for all shares not just financial shares has been particularly onerous. Mr. Kamp said Invesco has delayed the planned October launch of an Australian 130/30 strategy it has been incubating.
Still, with managers able to maintain existing short positions, even market neutral hasnt been derailed, managers said. If restrictions on shorting are extended, managers say theyll simply eliminate both their long and short positions in financial stocks.