To add further transparency to the process of shorting, the European Union stepped in last November (2012), proposing a set of rules that require mandatory reporting of significant net short positions.
The EU short-selling rules state: “Each market participant has to compute its net economic short position (i.e. including short positions through derivatives) into an asset at the end of each trading session. A short position held on a share has to be notified to the relevant Competent Authority when it is equal to or greater than 0.2 per cent of the issued share capital, and has to be publicly disclosed when it is equal to or greater than 0.5 per cent of the issued share capital.”
However, due to a lack of clarity over how the rules have been set out, in October the European Securities Markets Authority admitted implementation of the regulation has been difficult.
At the Wealth Management Association’s annual conference last month, Esma executive director Verena Ross, explained: “The regulation’s aim is to create transparency in short positions to the regulator and the public at large, and also include prohibitions around uncovered short sales.
“We have spent a lot of time trying to clarify how to implement this. There are a number of areas we have indicated that need further clarification.” .
Jenny Lowe is features editor at Investment Adviser
Combining positions in a single portfolio
According to JPMorgan Asset Management, of the primary differences between various long/short strategies is the percentage of portfolio assets held short in proportion to those held long.
Depending on this exposure, these portfolios generally fall into three broad categories:
Market neutral strategies
• Market neutral strategies use equal long and short positions (typically 100 per cent long and 100 per cent short). These portfolios seek to neutralise market risk and generate positive results regardless of market direction, with little or no exposure to overall market risk.
This strategy is most suitable for investors who have accumulated cash, already own traditional assets, are temporarily out of the market and/or have reduced risk tolerance.
Long/short hedged strategies
• Long/short hedged strategies use disproportionate long/short position ranges with a long bias (for example, 100 per cent long and 70-80 per cent short). These portfolios seek equity-like returns with less risk than the overall market.
This strategy is most suitable for investors who seek to add an opportunistic component to a portfolio and/or want managers to make directional bets.
130/30 strategies
• 130/30 strategies use shorting to pursue additional performance while controlling risk (typically 130 per cent long and 30 per cent short). These portfolios seek to increase returns relative to a market or benchmark with similar risk characteristics.
