Hedge funds chafe at extension of South Korea’s short-selling ban

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Hedge funds are up in arms over South Korea’s choice to increase its ban on brief promoting for six months, even after the nation’s inventory market made a powerful restoration from the March low sparked by the pandemic.

Seoul’s monetary watchdog mentioned on Thursday it will lengthen its preliminary six-month ban on the brief promoting of listed shares till March 15 2021, citing “widening market volatility amid a resurgence of Covid-19”.

The Monetary Providers Fee mentioned it will additionally strengthen punishment for unlawful short-selling practices.

However hedge fund managers are irritated at being stripped of an necessary hedging device amid fears of a bubble in elements of the inventory market inflated by frenzied shopping for by retail traders. South Korea is one among three nations on this planet that maintains such a ban, together with Malaysia and Indonesia.

“There is no such thing as a motive to increase the ban, on condition that inventory costs have recovered greater than sufficient,” mentioned Albert Yong, head of Seoul-based Petra Capital Administration. “The transfer might inflate a bubble within the bio sector, which might trigger larger losses on retail traders later.”

The benchmark Kospi Composite index has surged greater than 60 per cent from its low in mid-March, when the ban was first launched within the wake of file international funding outflows from the export-driven financial system.

Retail traders have since purchased a internet Received22.9tn ($19.3bn) of Kospi shares as international traders and native establishments have retreated.

South Korea’s financial system suffered its worst recession in 20 years within the second quarter, regardless of a comparatively gentle lockdown. The OECD expects output to shrink simply 0.eight per cent this yr, one of the best consequence amongst 37 OECD member nations. Progress on containing the pandemic is uneven, although: the nation just lately tightened restrictions as circumstances reached a five-month excessive.

The ban on brief promoting has contributed to a dizzying surge in healthcare shares, reflecting hopes amongst some traders that such firms are on the forefront of the race to develop Covid-19 remedies. The Kospi 200 Healthcare index has greater than doubled from its trough in March.

“The extension [of the ban] is in opposition to the worldwide requirements. It’s a political transfer to please retail traders, ignoring some optimistic results of brief promoting,” mentioned Bruce Lee, a former hedge fund supervisor. “It’s going to undermine capital market effectivity when the market is definitely overshooting its fundamentals.”

Some traders mentioned the prolonged ban on shorting would increase retail traders’ sentiment and spur extra inflows into the market, however would discourage hedge funds with long-short methods from making huge bets in South Korea. “The restrictions will definitely make international traders like us doubt the maturity of the nation’s capital market,” mentioned one US hedge fund supervisor.

Traders mentioned the lack to brief had additionally hobbled participation out there for extra conventional portfolios, which had been unable to hedge exposures to South Korean shares.

“Shoppers have positively walked away from Korea due to the shortage of any capability to hedge a protracted portfolio — not as a result of they wish to stroll in and brief all the things,” mentioned one trade veteran.

The Pan Asia Securities Lending Affiliation additionally queried the fee’s choice to increase the ban. The Hong Kong-based trade group mentioned in a press release that brief promoting “is a vital attribute of developed fairness markets” that helps “handle threat in traders’ portfolios and encourage good company governance”.

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